Gold: Between The Tweets

August 20, 2019

Once again, like his reality show, Mr. Trump orchestrated a spectacle choosing the optics of progress to meaningful progress itself.  After the most recent G 20 meeting, Mr. Trump was more interested in a photo op with Kim Jong Un and celebrated a short truce with the Chinese, instead of a long promised agreement or deal with North Korea.  Markets buoyed by the spectacle, overlooked concerns about the deterioration in the world economy caused by Trump’s “made in America” trade war which is into its second year and found to be not so easy to win.  Germany the locomotive of Europe is in freefall, as part of the collateral damage from the “forever” trade war, hurting market confidence. Foreign investment into United States too has collapsed, falling for the first time since 2008.

US growth is slowing not accelerating. The economic reality is that Trump’s new tariffs are a high-risk gamble, echoing the mistakes of the Dirty Thirties when countries in a “beggar thy neighbour” fashion, devalued their currencies in hopes of boosting exports to gain a competitive trade advantage but instead, exacerbated the Great Depression.

Lost. The American Dream

For the first time ever, Mr. Trump’s profligate spending has resulted in a $1.5 trillion deficit or 18 percent more spending than Obama’s final year in office when the country was still climbing out of the recession. Mr. Trump’s dilemma is that US revenues only totalled $3.3 trillion last year, while federal spending totalled $4.2 trillion. The Treasury is expected to borrow more than a trillion dollars, for the second year in a row. And, in signing a new budget deal with Congress that calls for spending billions, the deficit will be boosted by another trillion dollars without the promised spending cuts.

Most worryingly, is that much of America’s spending is made up of mandated entitlement issues and a patchwork health system, which must increasingly be financed by debt that produces no revenues to offset the string of trillion dollar deficits. And in leaving out the promised entitlement reforms, America’s aging population and entitlement costs have exploded which neither party will touch in the upcoming election.  The problem is that America is spending in the wrong places and the resultant deficit spending is unsustainable. This deficit, which the Chinese used to finance up to a third, needs to be financed. Who will fill that financing gap particularly since the escalation of the US-China trade tensions changes the financing calculus?

And this is where monetary policy comes in. US money supply is up almost a whopping 300 percent from 2008. In this artificial environment of zero interest rates and zero return, instead of funding productive investments, what essentially is free money has flowed into hard assets like real estate, classic cars, art and the stock market. And with the system flush with cash, Wall Street having created instruments of mass destruction like credit derivatives, only to watch them trigger the collapse in 2008 has created a new and improved vehicle, exchange traded funds (ETFs). Never has so much money been parked in so few instruments. ETFs are simply derivatives that have never before been tested in a downturn and pose a major market risk of contagion.

US Dollar Off its Pedestal

And now the confrontation between America and China puts the Fed in a bind. In tweeting that the “independent” Fed should lower rates, and blaming them for the economic slowdown hit by his own tariff war, the President has destabilized the financial system undermining the century old Federal Reserve System, one of the pillars of the dollar. The President has already filled three openings on the Fed’s seven member Board of Governors and will fill two more as he “stacks” the Fed with his choices, ensuring lower rates and weaker dollar. But in repeatedly criticizing and scapegoating the Fed, we believe that the prospect of lower interest rates is a good cause for dollar volatility. 

Our belief is that in calling for lower rates, Trump is similarly trying to talk the dollar down to an extent unseen in decades.  However, other countries will not sit idly by.  Trump may regret what he wishes for since his tweets raises the risk of the world lurching towards a full currency war. A move in the dollar would cause counter moves in other currencies, particularly Europe. China's offshore renminbi broke the symbolic “seven to the dollar” benchmark, for the first time in a decade reminding investors of the wave of devaluations that was a preface to the Great Depression.  Round one has started.

Once the center of global multilateralism, the United States’ unilateral stance will result in the replacement of the old world order of America hegemony by spheres or islands of influence, an Eastern island led by the Chinese, a European island led by Germany, a Latin American island led by Brazil and a North American Island led by the United States.  The world no longer will have a dominant superpower in this new world order as America relinquishes its role and hegemony.  Similarly, there will be various economic networks that sometimes may supersede relations and sometime these islands could eschew the economic basis, in place of nationalistic interests. And of course, the downside is that this balkanization of interests could see different countries seeking to put their own interests first. 

The United States is to be an observer, as a price for its isolation. The trade dispute for example between Japan and South Korea, or the seizing of ships in the Straits of Hormuz or the India/Pakistan fight over the Kashmir or Hong Kong Inc. protests are just a few flashpoints that flows from Donald Trump’s retreat.  All have echoes of Trump’s tactics using brinksmanship as a weapon to solve political spats but this time outside Western influence. The emergence of a multipolar world means the coming market cycle is likely to be different.  Uncertainty lies ahead. The US will have many challengers.

However unlike the 1985 Plaza Accord, when President Reagan coordinated the G-5 to help weaken the dollar, the browbeating of allies and even calling them currency manipulators will further isolate the United States. China has some $3 trillion of foreign exchange reserves, outmatching the United States with reserves of $127 billion and an Exchange Stabilization Fund of $74 billion. If the United States decides to ratchet up the trade war with a currency war, China not only has a bigger arsenal but the biggest casualty would be America’s unfettered open capital markets. Worrisome is that many of the conditions for a currency war, like the Thirties are already in place. The world economy is slowing, tariffs are escalating, negative interest rates abound and politicians like then are oblivious to the dangers. Gold is going to be a good thing to have.

The Fix Of Negative Interest Rates

Instead of averting a financial crisis a decade ago, the world’s central banks are again cutting interest rates fearful that the global economy will need help beset by Brexit, tariffs and escalating geopolitical concerns.  Since the global financial crisis a decade ago, central banks have experimented with fiscal tools like “helicopter money”, slashing rates to near zero and essentially printing money to buy bonds as the once experimental quantitative easing programmes pumped trillions into the stock markets, driving up asset prices and risk premiums.  Following the Fed’s dovish U-turn, Mario Draghi, the outgoing President of the European Central Bank (ECB), not only promised to cut rates further but also to buy more bonds in an effort to support the European economy. He also suggested that the ECB might buy equities emulating the Bank of Japan, who has dropped rates and in a stealth form of nationalisation has been buying equities in the market, owning about 75 percent of ETFs and 45 percent of the corporate market. Still domestic growth remains elusive.

Nowhere are the stakes higher than in the US where they will reach $22 trillion of debt in September.  The Fed recently cut rates for the first time since the aftermath of the financial crisis despite the US economy experiencing the longest running growth period ever. Central banks have abandoned “normalisation” and rather than raise rates, have again tempted fate by lowering rates below zero embarking on a monetary experiment started by the Swedish Riksbank in 2015 which sent rates deeper into negative territory.

Today there are some $17 trillion of government debt, up from $5 trillion in November yielding negative yields, which are crowding investors into shorter maturities. After experimenting with quantitative easing, central banks introduced negative yields, that have effectively removed the yield curve necessary for a sustainable capital market. Currently about one third of the government debt market and one quarter of the global bond market have negative yields. Negative rates reflects borrowing from the future and historically, a flashing recession signal. 

At one time, banks paid clients to park their cash in order to expand their lending capability. UBS, the big Swiss bank plans to charge clients to park deposits in excess of $2 million. Perhaps mattresses or socks will again make a comeback as a depository for cash.  In essence, debt is virtually worthless because investors are guaranteed to lose money if they hold to maturity. Of concern is that with negative issuances, future debt issuances to pay for spending or fill a widening gap between revenues and spending are destined to fail. Or, if the Fed tries to raise rates to attract needed funds, growth would sputter and Wall Street of course would head for the exits as market forces today play a bigger role than they used to.

We believe that the main structural reason for negative rates is that after the rounds and rounds of quantitative easing, central banks purchased most of the bond issuances in a failed effort to stimulate economic growth causing a shortage of “safe” assets. The demand for safe assets subsequently exceeded supply. As a consequence in a growing environment of yield scarcity, investors are forced to pay a premium to protect their principal. Furthermore, current interest rates have created such an illusion of debt sustainability that investors believe moral hazard has been eliminated, forcing them to chase riskier and more illiquid debt.

The hunger for yield has also penalized savers, banks, insurers and pension funds as the ability to generate needed profits caused a scramble for higher yielding paper, flattening the yield curve. That leaves capital markets in upheaval because the capital of banks, life insurance companies and pension funds have become more leveraged and heavily indebted in this zero-return market. These institutions once provided the capital to finance corporate America but with returns so meager, bigger risks are being taken. Equally concerning is that negative rates have spurned a generation of younger consumers to borrow excessively, unaware of the potential long-term interest burden. Today the victims of negative rates are growing, outweighing the benefits.

Central banks have become part of the problem.  Simply we are in uncharted territory particularly when Greek bonds today yield less than US Treasuries. Conventional policy is the unconventional.  Of concern is that negative rates were the very plank that ushered in the Great Inflation in the 70’s, the Asian crisis in the 90’s and of course, the Great Depression in the 30’s.

China, the Challenger

Trump’s isolationistic instincts and brand of nationalism cannot serve as the basis for a new world order. While some Americans might like to see Trump wrap himself in the flag, America’s allies are being tested with every tariff and tweet. For example, Washington’s confrontation with China already has damaged both economies and threatens the global economy but is only part of a much bigger and wider battle for global dominance. The Donald’s bluster is a one-note strategy and he keeps underestimating his opponent. Beijing shows no sign of buckling to Trump’s “beautiful trade war”. Today, China has a 100-year plan while the US seems to have a 24-hour news cycle plan. China ironically, is simply tethering the world economy ever closer to Beijing, aided by the United States.

China has become a superpower in only two decades. Like the US after the post Second World War period, China enjoys a huge single language advantage. Today China accounts for more companies on the Fortune Global 500, than the US. Beijing’s Belt and Road Initiative is similar to the US’ Marshall Plan, an enormous infrastructure initiative to help Western Europe rebuild after World War II,  but unlike the US plan, China is focusing internally to build infrastructure and link China with the world. China has mandated that each car company must have at least 10 percent of new energy vehicles include battery power and plug-ins. Sino-centered economic and financial ecosystem is the long-term goal. Noteworthy is that despite tariffs, China’s economy grew at 6 percent or 3 times that of the US GDP growth at 2 percent. And today, China is filling the vacuum left by the United States, extending its global influence and in internationalizing the renminbi, it reduces its dependence on the dollar and its dollar payment system.

The protracted trade war remains unresolved as does China’s intellectual property rights, US enforcement mechanisms and the blacklist on Huawei, the world’s largest telecom company. After less than a day of talks in Shanghai, both sides have moderated their expectations. China has smiled, negotiated when asked, laid down the red carpet for Trump and its tit-for-tat response has been measured, and some would say inscrutable. China has stopped buying American agricultural goods and so far has not boycotted or blacklisted America’s multinational firms in the same way America has targeted Huawei. China even relaxed rules allowing majority foreign ownership of domestic security companies next year, allowing UBS to set up shop in China.

However, China’s position has hardened with the US accusation that China is a “thuggish regime” for targeting a US diplomat, while China called the US a provocateur in “creating” the Hong Kong protest. The escalation continued when Trump tweeted a new 10 percent tariff on nearly every Chinese product sent to the US, but retreated when the market plunged in the worst sell off in a year. Amid the feud, US exports have slowed, global car manufacturing has collapsed and long-term bond yields have tumbled. With Trump feeling increasing pressure from American farmers, consumers and businesses ahead of the 2020 election and the stockmarket a hostage to the trade talks, it will not be easy to put Humpty Dumpty back together again.

Then, with the US dollar near multi-decade highs, Mr. Trump tweeted that countries were manipulating their currencies keeping them artificially weak against the dollar, raising concerns that a trade war will morph into a currency war. Currently on the monitoring list is a who’s who including Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia and Vietnam. The Treasury upped the scales in the trade war by officially calling China, a currency manipulator for the first time since 1994, risking more sanctions. The last time we had competitive devaluations, was in the Thirties, as a prelude to the Great Depression.

To be sure America’s self-inflicted trade war has caused huge imbalances in trade but evidence of manipulation of currencies is not evident, particularly since for almost half a century, we’ve had floating currencies with the US dollar as a benchmark.  Another reason is that America has a loose fiscal policy whilst others are maintaining a tighter stance. 

But, the cost of this new Cold War, mounts for years and maybe for generations to come. US manufacturing has entered into its sharpest downturn since 2009, a future drag on the economy beset by tariffs. American cotton exports to China have collapsed with prices falling 30 percent and inventories are at the highest in a decade. US farmers’ shipments of soybeans tripled to China at $21 billion but today shipments plunged a whopping 74 percent as Chinese buyers shifted to Latin American markets, giving preference to US competitors. Brazil, the world’s biggest soybean exporter benefitted while US shipments fell to 31 percent, the lowest on record.  Not surprisingly, Chinese investment in North America has fallen to five-year lows. There are no winners here.

The Great Uncoupling

Why does this all matter? Just as America displaced Britain as the world’s pre-eminent power after the war, so will America’s large debt and growing fiscal pressure usher in a new world order and leader. Chinese foreign exchange reserves today at $3.1 trillion is the largest in the world giving it plenty of ammunition to claim leadership in the creation of any new monetary order. China is not indebted as the West and as the world’s largest producer and consumer of gold, China could peg the renminbi to gold. Ironically, it was President Nixon that severed the dollar’s link to gold, creating a system of floating currencies that forever overturned fixed rates.  So again who can better withstand this trade war?

In the end, the United States finds itself in a lonely position relying too much on coercion at the expense of cooperation.  Mr. Trump’s political wrecking ball approach has disrupted the world order, rewriting the rules of engagement. Slowly the US is losing allies and some are aggressively pushing back over the aggressive policies.  With Mr. Trump's withdrawal from the TPP, the tearing up agreements on climate change, the Iran nuclear deal, and threatening to withdraw from the rules-based World Bank, the United States is scrapping half-century-old relationships. It seems that self-interest is more important in Mr. Trump's transactional world and each country must fend for themselves or “lose”. But there are limits.  While weaker countries must eschew to the “America First” approach, others and capital will fill the vacuum left by the Americans. America’s insistence upon maintaining primacy at all costs, will be costly indeed.

Gold is Back

America’s allies no longer trust the United States.  The world today is now entering a post-globalization era dominated by populist unrest, a wrecking ball approach to multilateral agreements, and protracted tensions between the US and China. Gold is a hedge against this uncertainty, an alternative to the dollar and a defensive asset.

Gold recently rose to six-year highs, buoyed by a combination of negative rates, global economic fears and the escalating tariff war.  For all these reasons, central banks have bought 651.5 tonnes of gold, 74 percent above a year earlier in an effort to diversify their reserves from the US dollar. For some, gold is a bulwark against the effects of the trade war and a hedge against a devalued dollar. Central bank purchases are expected to surpass last year’s purchases when they bought more gold than at any time since the end of the gold standard in 1972. China dumped Treasuries for the third month in a row, pushing holdings to the lowest in two years. Instead, China has sharply increased its gold hoard by adding 10 tonnes to reserves in July for the eighth month in a row, boosting reserves to almost 2,000 tonnes. Poland doubled its gold assets, becoming the largest holder in central Europe. Russia has been the biggest buyer, buying almost 19 tonnes in June, putting total holdings at 2,208 tonnes as they seek to evade the hegemony of the dollar.

Demand for gold was further supported by Indian jewellery purchases underpinned by ETF purchases of 52 tonnes to 2,600 tonnes, a six-year high according to the World Gold Council. Gold is taking a bigger part of the world’s reserves.

While the US dollar has appreciated 2 percent against major currencies, gold has even outperformed the dollar and other major currencies like the Canadian dollar, yen, ruble and euro. We believe the threat of a currency war will further boost gold as America debases the dollar to pay for its profligacy. We also believe this fiscal irresponsibility jeopardizes the dollar’s reserve status. As the world’s biggest borrower and the issuer of the world’s reserve currency, the United States faces a sharp adjustment. China is the largest creditor in the world and is the biggest consumer and producer of gold. The Shanghai Gold Exchange started in 2002, is today the largest physical market in the world, which could support the internationalization of the renminbi. India, the world’s second largest consumer of gold hopes to establish a gold exchange similar to the Shanghai Gold Exchange. Gold is moving east.

We believe the logical conclusion is a return to the gold standard. The US is the largest holder of gold and has the world’s largest debt. The only thing that underpins the dollar is confidence in the United States. We believe the past decade of money printing and Trump’s isolationist instincts are testing those limits as one can detect the decline of confidence in every part of the world.

With more than $17 trillion of government debt or about 27 percent of the global bond market with negative yields, like tariffs they are a tax on businesses and consumers – which is inflationary. And the inversion of the yield curve are warnings of a slowdown ahead. More debt purchases will widen the risk profile between bonds and equities and move more capital in the hunt for safety to hard assets, real estate and gold. In fact, we believe there is a correlation between the negative yielding debt and the increase in the price of gold. Negative yielding debt removes an obstacle in holding gold because gold does not pay income; it protects capital – the opposite of negative yielding bonds, which guarantee to loose money. Gold is a beneficiary of negative yields. In the rush for safety, it is the ultimate refuge.

Gold has broken out to six-year highs after breaking through resistance at $1,250 and $1,485. We expect gold will surpass the peak in the current cycle and maintain our $2,200 target within 18 months. Next November, the Americans will elect another inflationary president. That will be good for gold, but bad for the dollar.

Recommendations

The gold sector came alive as higher gold prices boosted margins.  Yet gold stocks remain relatively undervalued due to investor skepticism of the current move in gold. Gold has jumped 17 percent this year as its role as a safe haven replaced the greenback in the search for safe havens. We believe gold’s breakout and recent rally of the majors is only the beginning of a major bull run in gold and expect a subsequent significant move in the mid-tiers and junior exploration players. Reserve replacement is still a major industry problem exacerbated by the lack of exploration activity, which in the past was the lifeblood for the industry. In the interim, M&A activity will continue as the majors seek to reverse the decline in reserves and production.

However, overlooked in the recent enthusiasm for gold shares is the increase in all in sustaining cost and production declines as new money flowed into the more liquid major producers. We expect a waterfall effect and then the mid-tiers will attract interest, followed by the undervalued and overlooked junior developers. Only a few mines have been commissioned recently.  McEwen Mining achieved commercial production at Gold Bar in Nevada, joining producers Black Fox, El Gallo and San Jose. Lundin Gold will commission Fruta del Norte in Ecuador this June to produce 310,000 ounces annually for 15 years. Although a rising tide lifts all boats, the junior developers remain undervalued due in part to the lack of funding. 

We consequently like Barrick Gold, Agnico Eagle and B2 Gold among the majors for their attractive near term fundamentals and believe that the mid-tier and a basket of juniors is warranted with a view that acorns sometimes become trees.  We would also take advantage of the recent price to sell heavily indebted Yamana and take advantage of the price move to sell Iamgold, which benefitted from rumors of a takeover.

Agnico-Eagle Mines

Agnico-Eagle expects record gold production this year with a contribution from the Meladine mine in Nunavut which achieved commercial production ahead of schedule in May at a cost of $830 million. Meliadine contains proven and probable reserves of 3.8 million ounces of gold.  At Amaruq’s Whale Tail close by, commercial production is expected in the next quarter and thus Agnico will meet guidance of 1.75 million ounces at an all in cost of $900 per ounce. Goldex had a good quarter. Agnico-Eagle has an exciting pipeline of both exploration and development situations at Amaruq and Kittila. Flagship LaRonde produced almost 80,000 ounces in the quarter despite a shutdown.  At Canadian Malartic, mill quarterly throughput processed a record 58,000 tonnes per day, helping Agnico to produce 400,000 ounces in the quarter.  With mines in Canada, Finland, and Mexico, Agnico will spend $750 million this year to buildout the two Nunavut mines. We like the shares here for Agnico’s rising production profile and low jurisdictional risk.

Barrick Gold Corp.

Barrick Gold reported a solid quarter and with the successful acquisition of the remaining shares of Acacia will now be in a better position to negotiate with the Tanzanian government, removing a drag on Barrick's outlook.  The government’s recent approval to resume gold exports is positive. Barrick also shed more light on the Nevada JV (Nevada Gold Mine) where pretax synergies and cost savings of almost a half billion dollars for the first five years are expected. The JV will produce four million ounces and has a large reserve base of 48 million ounces with AISC under $800 an ounce.  Mining costs, severances and fleet consolidation will also boost netbacks and an integrated mining plan for the Nevada assets is expected.  Barrick has yet to prune its extensive portfolio of non-core assets which is expected to yield about $1.5 billion plus. The copper assets are also an attractive chip in the expected M&A boom. We expect Barrick to continue to be a major player through M&A activity and partnerships. We continue to recommend the shares here as the go-to gold player. 

Centamin PLC

Centamin reported a strong second quarter maintaining production guidance of 500,000 ounces at $900 AISC. Centamin’s processing plant performed well at 98.1 percent utilization.  Centamin has a strong balance sheet with some $300 million in cash and no debt.  The company expects further growth as underground grade improves and expects to produce another 20 to 30,000 ounces next year from underground. Centamin is an undervalued junior based in Egypt with a solid balance sheet and a rising growth profile.  Hold.

Centerra Gold Inc.

Centerra had a good quarter producing almost 200,000 ounces at 13 percent above forecasts.  Better grades at Kumtor in Kyrgyzstan and higher throughput at Mount Milligan in BC contributed to the improved outlook.  Centerra generated about $42 million in free cash flow allowing the paydown of the corporate credit facility.  Centerra's balance sheet has improved but negotiations with the Kyrgyz Republic remain protracted over the Strategic Agreement. Centerra was to make a lump sum some payment totaling $57 million to the government but the final agreement has yet to be finalized. Meantime, Centerra is building Oksut in Turkey, which should be in production early next year further diversifying its production. Hold.

Detour Gold Corp.

Northern Ontario based Detour Gold reported a much improved quarter due to better production and recoveries.  The Canadian producer decided to reduce its mining fleet but emphasized ore grade to bring down costs.  All in costs were in fact lower in the quarter due to lower strip ratios as the mine also benefited from the lower Canadian dollar.  Guidance has remained unchanged but noteworthy was that Detour generated free cash flow in the quarter. Detour has about $200 million of long-term debt due in 2020 which is not a problem since it can pay that with current cash on hand.  While Detour is a big Canadian producer, early production problems, low grades and high AISC make the shares an option on a higher gold price. Hold. 

Eldorado Gold Corp.

Mid-tier producer Eldorado Gold had a strong start up at Lamaque in Québec producing about 92,000 ounces with expected annual output of 117,000 ounces over the next seven years.  At Kisladag in Turkey, production was lower as Eldorado continues with what is in essence remnant mining.  Production at Efemcukuru also in Turkey produced about 25,000 ounces.  In Greece, Olympias was a disappointment but a change in government is expected to result in an improvement in the company’s relationship with the Greek government.  Eldorado’s billion plus investment in Greece has been stymied but the political logjam could break with the election of the pro-business New Democracy government recently elected. While investors have been disappointed over the lack of progress over restoring needed permits, Eldorado shares do not reflect any positive outcome.  However,  Eldorado’s 410,000 ounces of production this year, does not generate sufficient cash flow to pay down debt due next year.  We prefer B2Gold.

Kinross Gold Corp.

Kinross reported a strong quarter producing about 648,000 ounces in the quarter at AISC of $925 an ounce. Kinross’ Nevada Phase W and Vantage at Bald Mountain made a contribution. Kinross also announced the acquisition of the Chulbatkan project, a large gold heap leach mine in Far East Russia for $283 million of cash and shares.  The acquisition was surprising not for its fundamentals but that Kinross decided to expand its exposure in Russia. Although successfully operating in Russia for years, Kinross had been seeking to diversify and downplayed its exposure despite the Russian gold mines are cash cows. Ironically, Kinross’ earlier multi-billion major acquisition to diversify from Russia, Tasiast continues to have problems with the company yet to release the phase 2 mine plans due in part to ongoing negotiations with the Mauritanian government, which wants a larger stake.  We prefer Agnico-Eagle here.

Kirkland Lake Gold Ltd.

International producer Kirkland Lake had a strong quarter producing 215,000 ounces at AISC of $638 an ounce due to higher output from flagship Fosterville in Australia, which was offset by lower production coming from Macassa in Canada.  Kirkland Lake produces gold at a low cash cost of only $344 an ounce due in part to higher grade Fosterville (almost 40 gram per tonne) enabling  Kirkland to pile up about a half billion of  cash.  Free cash flow in the quarter was almost $60 million. As such, the company has been buying back its shares, but we expect Kirkland to make an acquisition using its shares because relative to its peers, its shares are expensive and Kirkland has a short reserve life. Hold.

New Gold Inc.

New Gold’s guidance was reaffirmed but the company still lost money due to a high all-in-cost at more than $1,000 an ounce.  Major spending will finally wrap up as Rainy River is near completion but another new life of mine plan is expected shortly.  On a positive note, Rainy River’s mill throughput in June was a record and recoveries at 93 percent, suggesting better utilization but the pared down life of mine plan could change things.   Noteworthy was that grade and the results were disappointing.  Still, New Gold managed to raise $150 million of equity although debt remains high at almost $800 million. New Gold is still burning cash to complete Rainy River and thus we expect either more dilution or debt restructuring. Sell.   

Newmont Goldcorp Corporation

Newmont reported a positive quarter producing 1.1 million ounces at AISC of $1,000 an ounce. Former flagship Penasquito’s operations have ramped up after the settlement of the 50-day illegal blockade.  Cash on hand is near $1.8 billion after paying down Goldcorp’s debt. Noteworthy is that Newmont has confirmed what we have been saying for some time, that the Goldcorp acquisition might take 2 to 3 years to digest.  While realistic, Newmont's hands will be full, needing to decide what to do with Goldcorp's Coffee , Eleonore, Red Lake and Cochenour’s where ground water caused a halt in mining. Also Newmont is looking to improve Penasquito and Cerro Negro. While, Newmont shares are trading at a huge discount compared to its large cap peers due to investor disenchantment of the Goldcorp acquisition, the admission that it is dead money for a while, suggests Barrick is a better buy because they have already started optimizing their portfolio while Newmont has just started.  

Yamana Gold Inc.

Yamana had a strong quarter but could only eke out a one-cent gain.  Yamana is focusing on Cerro Moro, El Penon and Minera Florida as well as boosting grade and production at Jacobina. Jacobina’s guidance was increased to 152,000 ounces in a plant optimization, which could increase output to 170,000 ounces annually. Cerro Moro was built on time, on budget and produced 93,000 ounces and 4.1 million ounces of silver in its first year. Yamana sold Chapada for $1 billion, which allows it to pay down $800 million of debt leaving a billion but Yamana is still left with too much debt, which is a problem.  Sell.

John R. Ing

Jing@maisonplacements.com

(Please refer to the Legal Section of our website (maisonplacements.com) for our Research Disclosures for an explanation of our rating structure (click here).

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Pure gold is non-toxic when ingested.

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