Barrick's Red Metal Glitter

Morning Miners!

It is 5:49 AM. Have a hot cup of Tuesday. Anyone who knows Sweet Ruby T knows her trademark Black Hills gold earrings and copper bracelet around her wrist. From her windshield, copper and gold look good together and she says the red metal is good for your health. She must have passed a some of her style and wisdom on to Barrick Gold...

Barrick's Red Metal Glitter

It isn't surprising to hear a big miner has acquired another mining company. Buying out another miner is an easier way to increase your mineral reserves than digging core samples for stuff that's getting increasingly harder to find. It is headline news when a big guy changes business strategy in the process.

Yesterday Barrick Gold Corp. announced plans to buy Equinox Minerals Ltd. to give the gold producer a copper mine in Zambia and a copper project in Saudi Arabia. Here are Barrick's press releases on the transaction yesterday and an update today:

Barrick Announces Agreement to Acquire Equinox (Press release, 4/25/2011)

Barrick Announces Commencement of Offer to Acquire Equinox (Press release, 4/26/2011)

Mining Editor Adella Harding wrote about the deal in the Elko Daily Free Press:


Barrick to acquire Equinox copper company (Adella Harding, Elko Daily Free Press, 1:11 PM PT, 4/45/2011)

With a major presence in Zambia, Barrick changes its path forward to include significant copper holdings as it is becomes more and more difficult to grow on major gold projects alone. This move is also a practical diversification form a single product focus; gold and copper prices sometimes move together, sometimes in opposition. A 1-year share price comparison of copper giant Freeport McMoRan (FCX, green line) with Barrick Gold (ABX, blue line) illustrates this advantage:


Both have done very well to date with Barrick up 25% and Freeport up 35% in twelve months. It is interesting to note that last June, when Freeport and other miners were taken to the woodshed, Barrick held up pretty well. As copper prices surged toward the end of 2010, Freeport share price soared when Barrick was in the doldrums. Taken together, the combination of the two affords good returns and reduced volatility over a variety of market conditions. This is no doubt behind some of the logic on the Barrick board.

There are advantages to diversification from a cost viewpoint too. This report has pointed out that if a mining company buys fuel in terms of its primary product, copper miners are presently in a much better position than gold diggers. A pound of copper buys about as many barrels of oil today as it did during the dark days of last June (.384 bbl/lb versus 0.386 bbl/lb). An ounce of gold bought 17 barrels of oil in early June 2010, now it fetches only a little over 13 barrels.

And don't forget the accountants. Freeport is able to produce copper for roughly a buck-a-pound because it applies profits from its gold and molybdenum by-products to the cost of copper production. Barrick, by acquiring Equinox, can apply copper profits to the cost of producing its primary product to maintain their standing as a low-cost gold producer.

As Ruby says, copper and gold look good together. We'll close with an article from our favorite gold bug in London, Larry Williams. The pending Barrick deal must be a little like seeing your girlfriend with another guy on Saturday night...

Is copper the new gold for Barrick? (Lawrence Williams, London, Mineweb, Monday , 25 Apr 2011)


Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index(EMI) is above-par at 512.69, down from yesterday's 566.88 but above the 1-month moving average of 486.78. The EMI continues to be down from the high set on January 4th; it set a new 2011 low on March 15th. A positive trend from the bottom continues to be intact if we can stay above the 1-month average.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record high for the EMI is 816.78 set 01/04/2011; the low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between good lands and bad lands for the metals & miners.

200-day averages are used in the EMI to normalize current mining company share price and are updated monthly. Upper and lower trend lines are updated weekly.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is below-par at 69.17, up from yesterday's 68.39 but below its 1-month average of 69.54. Today's Value Adjusted Gold Price (VAGP) is $1,816.4/oz.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. Although gold prices have been on the rise, the GVI has been trending down since 6/7/2010 when it had a value of 100. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has been a reliable proxy for global growth and 3) silver is a precious metal that now competes with gold for investment and as a hedge against fiat currencies.

The Value Adjusted Gold Price (VAGP) is a level that supports current oil, copper & oil prices based on historical commodity norms. If the daily COMEX gold price is below the VAGP, then gold is undervalued; if above, overvalued.

Daily Oil Watch

Latest Nevada Fuel Prices

On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in the Middle East and North Africa (MENA). It is now above $120/bbl with a large spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX (see note 1). The Report normally follows the latter but will track both until things settle out in the region.

Here are the key front-month contracts as of this morning:

NYMEX light sweet crude $112.10
ICE North Sea Brent crude $123.89
Spread (ICE- NYMEX) = $11.79 (Yesterday's $11.32)

Here are the August contracts* with a narrower spread:

NYMEX light sweet crude $112.87
ICE North Sea Brent crude $123.12
Spread (ICE- NYMEX) = $10.25 (Yesterday's $9.84)

* NYMEX futures contracts have rolled forward, we now show June & August for a 2-month look-ahead

Prices are off their crisis highs but we now have $120+ Brent and $110+ NYMEX in August favoring higher oil prices throughout the summer. My December prediction that we would see NYMEX $100/bbl oil before the Fourth of July came true on February 23rd.

Eureka Outlook Dashboard

4-WD is ON - The miners may on improving rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is above its 50-day and 100-day moving average today and is comfortably above its 200-day average of $47.94 (our new warning level, 04/15 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The GREEN light is turned back on for Commodity Reflation with copper trading comfortably above $3.50/lb

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 Watch as the Federal Reserve resumes buying Treasurys (aka QE2)

The GREEN light is turned back on for Investor Confidence as investment returns to the equity markets

The VERY RED light is turned on our Fuel Gauge with oil above $110

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, R&R Partners parts ways with Nevada Mining Association, Obama budget includes mining royalty , Mineral commission fights consolidation, Democrats seek to repeal mining tax from the constitution, Rhoads, Ellison oppose repeal of net proceeds tax, Proposal could change net proceeds tax, 'You get to deduct WHAT???' Nevada lawmakers ask gold miners

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is down $0.18 in early trading at $112.10 (June contract, most active); Gold is down $5.4 to $1503.7 (June contract, most active); Silver is down $1.354 to $45.795 (May contract, most active); Copper is up $0.0060 to $4.3090 (May contract, most active)

Western Molybdenum Oxide is $16.99; European Molybdenum Oxide is $17.12; LME cash seller is $17.32, LME moly 3-month seller's contract is $17.46

Stock Market Morning Update

The DOW is up 40.91 points to 12,520.79; the S&P 500 is up 5.29 at 1,340.54

Miners are mixed:

Barrick (ABX) $50.90 down 1.85%
Newmont (NEM) $57.36 down 0.74%
US Gold (UXG) $9.00 down 1.21%
General Moly (Eureka Moly, LLC) (GMO) $5.04 down 0.79%
Thompson Creek (TC) $12.28 unchanged
Freeport-McMoRan (FCX) $54.58 down 0.38% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are mixed (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $36.05 down 0.55% - global steel producer
POSCO (PKX) $109.00 up 0.17% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is down 0.69% at $1,936,625.34 (what's this?).

Cheers,

Colonel Possum

Note 1 - West Texas intermediate (WTI), also known as Texas light sweet, is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts. The price of WTI is often referenced in North American news reports on oil prices, alongside the price of North Sea Brent crude (source: Wikipedia)

Headline photograph by Mariana Titus

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market