CEO and Chief Investment Officer
U.S. Global Investors
www.unsfunds.com
For the week, spot gold closed at $1,596.82, down 18.06 per ounce, or 1.12 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 1.42 percent. The U.S. Trade-Weighted Dollar Index gained 0.29 percent for the week.
Strengths
- Agnico-Eagle Mines has agreed to acquire all the issued and outstanding common shares of Urastar Gold for 0.25 Canadian dollars per share. The agreed price represents a 42.9 percent premium over the closing price of Urastar’s shares on March 25. We see the recent increase in M&A activity in the sector as proof that junior miners and explorers are trading well below their intrinsic values. The “housing collapse” we have seen recently in the sector has left some truly valuable assets unloved and unappreciated, providing for a great opportunity to pick them up and benefit from a higher resale value.
- NGEx Resources reported initial results from this quarter’s drilling program at the Josemaria copper-gold porphyry project in San Juan Province, Argentina. The big news is a series of 100m step out hits of 230.5 meters of 0.62 percent copper and 0.24 grams per ton of gold. This result works to extend the enriched zone to the north by roughly 100 meters and suggests the resource may extend deeper in this new area.
- David Zervos of Jefferies recently wrote to justify his position to stay away from equity markets. Zervos acknowledges he told investors to ignore the sequester and the Italian election, but the Cyprus situation is much more worrisome in his opinion. He argues that investors may miss out on a one or two percent rise in the market overall, but the tail risk is too difficult to quantify and the chances of a setback look more like 30 to 40 percent. Zervos has been a fan of protecting one’s wealth through diversification into hard assets.
Weaknesses
- Newcrest Mining dropped its full year 2012-2013 production guidance from 2.15 million gold ounces to 2 million ounces. The previous guidance will not be achievable as the company faces restricted capacity at its Lihir operation, following the shutdown of one of its four autoclaves for repairs. Furthermore, the company has been dealing with soft ground conditions at its Gosowong mine, which has prevented access to the higher grade ore. The company has lost more than 8 percent of its market capitalization following the news.
- Allied Navada Gold is replacing its CEO Scott Caldwell with current Chairman Bob Buchan. It appears the board of directors was not satisfied with Mr. Caldwell’s management of the expansion at the Hycroft mine. In the board’s opinion, Mr. Buchan will lead to a better-performing operation at Hycroft, together with a more efficient expansion process. Investors do not appear to be satisfied with the news as they sold off the company as much as 8.6 percent intraday on Thursday.
- Novagold Resources announced the appointment of ex-Barrick employee Richard Williams as Vice President of Engineering to head development at its flagship Donlin project in Alaska, as well as its Galore project in British Columbia. Despite the fact that Mr. Williams spent over 30 years with Barrick working in some of its flagship projects, investors may not be convinced of the value creation of his arrival, given that Novagold’s shares traded down as much as 6.5 percent intraday on Thursday.
Opportunities
- The “housing collapse” scenario we alluded to above, to put the fall of the gold miner stocks in perspective, is something that should resonate with investors that look for repeatable patterns that they can profit from. Nobody appears to be paying attention to the string of corporate activity that is gradually gathering force. There are a number of truly valuable junior and mid-tier gold assets that are unloved and unappreciated, thus providing for a great opportunity to pick them up and benefit from a higher resale value.
- As if the Cyprus debate had not given savers enough to fear, Eurogroup’s Jeroen Dijsselbloem sent markets into a downward spiral when he stated that the Cyprus bank restructuring plan should be seen as a template for the rest of the Eurozone. The harsh rebuttals forced him to retract his statement, but the damage had been done. Investors around the world now know that the next EU bailout will certainly take a similar form as the Cyprus one. After all, politicians in countries like Germany and the Netherlands (where Dijsselbloem is from) are finding it harder to justify bailouts to their electorates. We interpret Dijsselbloem’s statement as an open invitation to withdraw - without delay - any savings in the bank and invest them in hard assets, especially gold.
- In his Wednesday letter to subscribers, David Rosenberg comments on the failure of the two latest periods in which the Fed attempted to create prosperity through the illusion of paper wealth. He argues that both of these attempts aimed to spur consumer spending relying on asset inflation, rather than driving economic growth by way of promoting savings and investment. He reflects on this issue, as it appears the Fed may be under new leadership next year, with Janet Yellen as the most likely candidate to follow Bernanke. The street believes Yellen has an inclination to be more expansionary than Bernanke, and perhaps even brave enough to pursue a nominal GDP-targeting policy. The longer the faucet keeps going, the more bullish the case for gold.
Threats
- Metals consultancy CPM Group argues in this year’s Gold Yearbook that the bull-run for gold already ended in 2011, despite gold’s 6.2 percent gain in 2012. In its opinion, the bullish news gold bugs have been holding onto for the last twelve months, namely sovereign gold purchases and a hypothetical increase of gold’s role under Basel III, have been largely exaggerated or misinterpreted.
- John Thornton received $17 million in compensation for 2012 for his role as co-Chairman of Barrick Gold. This amount includes a one-off $11.9 million signing bonus in cash, meant for him to purchase shares of the company in the open market, in what we believe is a strategy to align his personal interests with those of the company. While we applaud the move by Barrick to compel Mr. Thornton to use the totality of his bonus for stock purchases, we believe it shows very poor corporate governance to pay directors and executives this handsomely when the company’s stock plunges nearly 25 percent during the year in question.
- The long-time friendly mining jurisdiction of Nevada is considering giving a blow to mining producers in the state. The 5 percent cap on net proceed taxes paid by miners is at risk of being lifted, exposing companies to higher tax rates. The move seeks to fund cash-starved local governments, and revenue-desperate school districts. The Nevada State Committee unanimously approved the proposal which will go to Nevada Legislature before heading to a sort of referendum. The proposal, set to raise an estimated $600 to $800 million, would not be implemented before 2015.
