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SWOT Analysis Of Precious Metals: Gold Sales Surge In Japan

CEO & Chief Investment Officer @ U.S. Global Investors
January 29, 2014

Every week, our investment team reviews a variety of sources to formulate a summary of the top events in the gold, resources, and emerging markets. The results are categorized in terms of Strengths, Weaknesses, Opportunities and Threats. Investors can use this SWOT model to help make informed decisions about gold and gold stock investments.

Here is the SWOT for the week:

Strengths

  • Gold sales by Japan’s biggest bullion retailers surged 63 percent to a five-year high, as prices slumped during 2013. Sales of gold bars to local investors soared to 37.3 metric tonnes from 22.9 metric tonnes a year earlier.  This surge in sales is attributable to the Abenomics policy of weakening the yen, as investors became very concerned about obtaining a hedge against inflation.
  • In addition, due to softer platinum prices and an increasing interest in platinum jewelry from Chinese consumers, China’s platinum imports surged to a new record high of 3.16 million ounces in 2013, up 23.5 percent year-over-year. December imports soared 86.5 percent year-over-year to 369,500 ounces, the second-highest number on record.
  • M-Partners initiated coverage of Atico Mining Corporation with a BUY rating and a one-year target price of $1.80 per share. Atico has earned a 90 percent interest in the El Roble mine, effectively evolving from an explorer to a producer overnight, while beginning to generate cash flow. With an estimated head grade of 3.4 percent copper and 2.4 grams per tonne gold, the strong earning potential helps to de-risk the project. Atico currently trades at 0.9 times 2015 EBIDA, which compares to its producing peers at 4.7 times.
     

Weaknesses

  • Analysts predict lower gold prices this year. According to a London Bullion Market Association survey, gold will average $1,219 an ounce in 2014. They further predict a high and low trading range of $1,379 to $1,067, respectively. In addition, Morgan Stanley cut its gold target price by 12 percent to $1,160 for 2014, while the 2015 price was also cut by 13 percent to $1,138. Morgan Stanley believes that gold will extend declines this year as gains in the equity market reduce the need for haven assets and an increase in regulations hurt risk appetite.
  • Thomson Reuters GFMS survey says that the professional gold market is obsessed with the tapering issue. Despite the fact that tapering is largely fully discounted, there has been quite a dichotomy in the gold market over the past year. GFMS notes that professional investors continue to lose interest in gold, but “grass roots” buyers maintain their healthy appetite for the metal.
  • As at least 70,000 workers prepared to begin a strike, South Africa deployed extra police across its platinum belt, which is the world’s richest deposit of the metal. The strike, initiated by the Association of Mineworkers and Construction Union, will disturb operations accounting for about 70 percent of global output of the precious metal. Platinum’s ratio to gold rose to the highest level since June 2011 as the strike began.
     
  • Opportunities
     
  • Eric Lemieux, a mining analyst with Laurentian Bank Securities in Quebec, keeps his top pick for the year as Virginia Mines. This company has an exceptionally well-managed team and a focused business model. CEO Andre Gaumond said that he wants to be at the beginning of the food chain with significant discoveries, and the end of the food chain with a royalty portfolio. Virginia’s Eleonore discovery should go into production in 2014 with Goldcorp as the operator. Additionally, a recent discovery of a new parallel zone sets the stage for the project to grow.
  • Another pick for this year by Eric Lemieux is Balmoral Resources Ltd. He believes that Balmoral has done a very good job in amassing a strong portfolio of properties in the Detour Trend. It is a shining star right now in Quebec. The company was nominated as the prospector of the year in November 2013, a testament to the good work that CEO Drain Wagner and his team are doing. With about $8 million in cash and equivalents, a hot project, financial capacity, a good team and geological knowledge, it is very well positioned for 2014. Detour Gold is very much in need of higher grade ores to blend with its struggling newly-commissioned, low-grade Detour Lake Mine to improve its economics.
  • Northern Star Resources in Australia has hit the jackpot with several of Barrick Gold’s recently announced divestitures.  At the beginning of the month, Barrick Gold sold Northern Star its Plutonic mine for $22 million, which boosted production by 100 percent to 200,000 ounces per year.  Northern Star’s share price surged 20 percent after the deal.  This week Barrick announced the sale of its interest in the Knowna Bell and Kundana mine in Western Australia to Northern Star Resources for $75 million, bringing Northern Star’s annual gold production up to 350,000 ounces per year. Effectively, Barrick has transferred roughly $1 billion in mining resources to Northern Star for less than $100 million.
     
  • Threats
     
  • AngloGold Ashanti Ltd., the world’s third-biggest gold producer, announced that it will make significant changes to its Obuasi mine in Ghana. The company’s problems at the mine include labor laws that make it difficult to fire workers, outdated work practices, along with illegal miners.
  • Moody’s Investors Service ranks Newcrest Mining’s debt as one level above junk, and has negative outlooks on the credit. Standard & Poor’s also ranks Newcrest at the lowest investment grade with a stable outlook.
  • The Ministry of Finance in Indonesia imposed a new duty on exporting minerals which includes copper concentrates. For Freeport-McMoRan Copper and Newmont Mining, this means an even larger tax burden going forward. Although both companies contend that the new Indonesian export tax is in breach of their Contracts of Work with the Indonesian government, Freeport officially stressed that it prefers to keep negotiating with the government, rather than seek international arbitration. Freeport further pointed out that it will be paying a very large amount of money to the government moving forward over the life of the contract.
     
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See the strengths, weaknesses, opportunities and threats of the gold market every week by subscribing to the Investor Alert. It arrives in your email inbox every Friday evening and best yet, it’s free.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Past performance does not guarantee future results. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The following securities mentioned were held by one or more of U.S. Global Investors Funds as of 12/31/13: AngloGold Ashanti, Atico Mining Corporation, Balmoral Resources, Barrick Gold, Freeport-McMoRan Copper, Newcrest Mining, Newmont Mining, Virginia Mines

Frank Holmes is the CEO and Chief Investment Officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. Under his guidance, the company’s funds have received numerous awards and honors including more than two dozen Lipper Fund Awards and certificates. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal. He is also the co-author of “The Goldwatcher: Demystifying Gold Investing.” Mr. Holmes is engaged in a number of international philanthropies. He is a member of the President’s Circle and on the investment committee of the International Crisis Group, which works to resolve conflict around the world. He is also an advisor to the William J. Clinton Foundation on sustainable development in countries with resource-based economies. Mr. Holmes is a native of Toronto and is a graduate of the University of Western Ontario with a bachelor’s degree in economics. He is a former president and chairman of the Toronto Society of the Investment Dealers Association. Mr. Holmes is a much-sought-after keynote speaker at national and international investment conferences. He is also a regular commentator on the financial television networks CNBC, Bloomberg and Fox Business, and has been profiled by Fortune, Barron’s, The Financial Times and other publications.  Visit the U.S. Global Investors website at http://www.usfunds.com.  You can contact Frank at: [email protected].


The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.
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