Gold sector going from strength to strength
Key Points
- ASX Gold Index up 141% from Dec 2014 lows and +55% in 2016
- Dawes Points 2016 Portfolio up 68%, 2015 Portfolio up 165%
- Gold price beginning its next upmove
- Australia's regional gold provinces offer great potential
- Key recommended producers are NST, EVN, TBR, NCM, MLX
- Recommended emerging producers BLK, AHK, CYL, PNR, AUC
Australian Gold Sector is having a wonderful start to 2016 with many of our preferred stocks making new all-time highs in the confluence of cost reductions, increased gold production and the highest A$ gold price in almost 5 years. The Dawes Points Portfolios of producers have provided high returns with little risk because of the strong resource asset bases, low debt levels and rising cash flows. Dividends should also flow strongly. Gains have been substantial and further gains are anticipated as the ASX XGD Gold Index heads for our 2016 target of 6000, now just 1900pts away.
ASX Gold Stocks are still cheap on average against the A$ gold price and are not over priced by any means.
And the XGD is still down 50% from its highs.
Domestic producers are still outperforming offshore producers although some offshore players are starting to catch up.
Of interest here is the past three months from the last intermediate peak in week ending 4 March.
The ASX-listed Australian based with domestic operations did well, aided by the weaker A$, and some have showed relative strength showing investor appreciation of value.
The ASX-listed Australian based with overseas operations had a mixed 3 months but PRU, RSG and TRY are showing strong relative strength and should continue to do well.
|
Company
|
ASX
|
A$ 4 Mar 16
|
3 June 16
|
%change
|
Comment
|
|
Doray Minerals
|
DRM
|
0.93
|
0.90
|
-3%
|
Value here
|
|
Evolution Mining
|
EVN
|
1.85
|
2.01
|
9%
|
Performing
|
|
Gold Road Resources
|
GOR
|
0.50
|
0.59
|
19%
|
Outperform
|
|
Newcrest Mining
|
NCM
|
17.20
|
19.76
|
15%
|
Strong
|
|
Northern Star Resources
|
NST
|
3.97
|
4.24
|
7%
|
Performing
|
|
Regis Resources
|
RRL
|
2.70
|
2.95
|
9%
|
Performing
|
|
Saracen Mineral Holdings
|
SAR
|
1.06
|
1.15
|
8%
|
Performing
|
|
St Barbara
|
SBM
|
2.02
|
2.62
|
30%
|
Very strong
|
|
Silver Lake Resources
|
SLR
|
0.37
|
0.45
|
23%
|
Very strong
|
|
Tribune Resources
|
TBR
|
3.66
|
7.35
|
101%
|
Thank you!!
|
|
Index Value
|
|
689
|
793
|
+15%
|
Best place to be
|
|
|
|
|
|
|
|
|
Beadell Resources
|
BDR
|
0.28
|
0.29
|
5%
|
OK
|
|
Kingsgate Consolidated
|
KCN
|
0.45
|
0.41
|
-9%
|
Licence issues???
|
|
Kingsrose Mining
|
KRM
|
0.26
|
0.17
|
-35%
|
No thanks
|
|
Medusa Mining
|
MML
|
0.74
|
0.65
|
-13%
|
Value created
|
|
OceanaGold Corp
|
OCG
|
3.92
|
4.07
|
4%
|
Performing
|
|
Perseus Mining
|
PRU
|
3.92
|
0.49
|
31%
|
Relative value
|
|
Resolute Mining
|
RSG
|
0.38
|
0.97
|
58%
|
Relative value
|
|
Troy Resources
|
TRY
|
0.62
|
0.55
|
13%
|
Relative value
|
|
Index Value
|
|
78
|
77
|
-1%
|
Still tough
|
|
Overall Values
|
|
417
|
475
|
+14%
|
|
|
XGD
|
|
3598
|
4099
|
+14%
|
|
The Gold Sector share of All Ords turnover is rising nicely now to give further confirmation.
However, the ASX Gold Index is a moveable feast so we might need to be careful in our conclusions.
S&P uses its ASX 300 Index to determine the sub indices.
If a mining company fits in the ASX 300 it can be in the Metals and Mining, Small Resources or Gold.
If a handful of the 60 odd lithium stocks make the ASX300 some gold stocks might miss out. Or if Fintechs have a run you might also miss out.
Look at this with the Gold Sector.
The XGD share of ASX All Ord turnover is now around 4% based on 24 stocks which is 8% of all ASX 300 stocks. At the peak in 2011-2012 there were 52 companies in the XGD making it over 15% of companies on ASX but making only about 6-7% of All Ords turnover.
I used to think it was good when gold stocks made up 15% of the ASX300 companies. I am now not sure what this XGD Index means now. Do you? Please let me know if you do.
I tend to think that ASX cast the resources sector down the river when it sold its indices to S&P.
For the Outlook, evidence set out in Dawes Points over the past year or so and more particularly in the past five months gives a reasonable confirmation that the Bear Market since 2011 has ended and that a new Bull Market is underway. The supply/demand picture for the gold market looks strong and the uptrend should last years.
The duration of the first stage from about 1999 to 2011 was as much as 11 years with almost five years of correction. In my experience, markets will have a second leg that is at least as long as the first. So I expect at least 10 years of bull market where an uptrend will be established that supports higher prices. But it won't be over by then, there will be much more to correct the massive imbalances of the Western Welfare State for many years yet.
So how might we project future prices?
If we took the underlying uptrend from US$250 in 2000 to about US$1600 in 2011 (not just a line from the lows to the US$1923 high) we can come up with about 17%pa.
Since 2000 gold had an average annual volatility of 15.5% so possibly a 10% pa uptrend would be reasonable to start with.
If we took US$1050 in early 2016 as the low, we can come up with various uptrend base line price projections to the end of 2016 and for 5 years to 2020 and 10 years to 2025.
In A$ at US$/A$ = 0.75 the figures look a lot of fun!
However, in the Dawes Points world the A$ will rise to follow gold and gold stocks so it won't be this high.
Nevertheless, the theme here is that once you get your core gold stocks like NST, EVN and NCM you should never be a seller. The dividend flow will be outstanding.
Keep coming back to the long term to get your perspectives.
Gold is in a long term bull market that should run for years yet and this wave count graphic shows the strength in 2011 creating an `irregular B wave' that was very unusual but is underpinning the great power developing in gold. Much, much higher gold prices are coming in the decades ahead.
This long term graphic from Barrons also shows the long term significance of the recent low in major gold mining shares.
With this we really know where we are and where we are going!
Heed the Markets not the Commentators!!
In recent times I have made a number of site visits to assess the prospects of the companies.
It is so important to visit and attempt to understand the local regional geology and mineral endowment that are so well intertwined. Understanding this substantially reduces exploration risk because so often it means a matter of `where' and `when' and not `if' mineralisation is found.
Also keep in mind that the Australian Gold Mining Industry currently has a large network of milling plant and haul road infrastructure with underutilised capacity and also excess contracting capacity so mine development lead times can be so much shorter before cashflows come through. Gold mining is a cashflow business and just not a few speculative drill holes.
The geological understanding of the Yilgarn is continually evolving and the past decade has provided some major advances.
WA Government has also made great strides in digitising the bountiful data on WA's numerous mineral deposits as it makes it determined thrust to become the global #1 mining destination and the world's most online efficient administration.
And look at this.
WA produces about 65-70% of Australia's gold and most comes from the Yilgarn Archean Greenstone Belts that spread across WA in mostly NW-SE trends.
The Dawes Points regional plays are well placed with large tenement holdings in the best parts.
From WA's Archean Greenstone Yilgarn Craton west to east we have
- Boddington 30moz
- Katanning AUC 0.6moz (1moz? -3moz??)
- Southern Cross Nothing of interest yet
- Bullabulling Zijin 4-5moz Golden Eagle IPO (0.15moz -0.7moz? 1.5moz?)
- Kalgoorlie
- Zuleika Mineralised Corridor (simply the best!) TBR, NST, EVN, TNR
- Higginsville MLX
- Leonora Trend SBM KIN
- Laverton RRL SAR BRB DCN
- Yamarna Belt GOR
- Tropicana Belt IGO
- Up North
- Wiluna 4.8moz BLK
- Murchison DRM
Elsewhere in Australia in important goldfields we have
- Lachlan Fold Belt Cadia NCM (43moz Au )
- Bendigo Whitelaw Mineralised Corridor CYL (1- 15 - 20moz?????)
- Tennant Ck TRM (0.1moz - 2moz???)
- Gawler Craton WGP TYX
- New England Fold Belt WRM
- Pine Creek Geosyncline AHK
We are invested in most of these and we can sit back and watch, share and finance the growth over the next decade.
There will be more of course and we will applaud and encourage our explorers and keep in mind that about 68% of Australia's landmass has some sort of surface cover so the search for deposits without outcrop can run for many years yet.
We are also watching the true explorers with base metal and gold targets. Think of THX, CZI and ARS in particular. Has ARS found another copper-gold porphyry in NSW?
My concluding view remains that the Australian Gold Sector is leading the world and that gold is leading the entire economic outlook.
And reading the IRESS news flow it seems the gold stock analyst community has still yet to understand what is happening. The numerous upgradings of a price target of a stock to 20% below the current price in a moving market shows they are still `on the wrong side of the market'.
Hold the course or jump on board now. The journey should still be long and rewarding.
Contact me at +61 2 9222 9111 Bdawes@psec.com.au
Some sad news.
Vale Keith Harold Dawes 1948 – 2016 PhD MA Dip Ed
Lifelong friend, mentor, psychologist, educator, farmer, musician, author and big brother.
Suddenly, last week.
So much experience in life but life is not always golden.
Resting in Peace
Barry Dawes
I own, or control in diversified portfolios, most of the stocks mentioned in this report.
Edition #49
The rally in the gold price since Jan 2016 has also provided something equally fascinating.
Here the B wave rally to US$1320 has again exceeded the Wave I high of just under US$1300.
The subsequent breakout above US$1320 is important.
Germany
Both these key markets are well positioned technically and long term (and now short term) oversold.
The picture in the US seems robust indeed with the major indices pushing against all time highs.
Dow Jones Industrial Average 30 close to all time highs
NASDAQ seems to want to break sharply higher
Russell 2000
Shanghai still hasn't collapsed!
India is moving higher after its correction
While equities are doing just fine it seems commodities are now rallying from incredibly oversold levels.
And this critical price relative is really quite instructive. Extremes provide great turning points and great entry points.
Which brings us back to gold stocks.
The ASX 300 XGD Gold Index will probably get a boost through the addition of an extra two or three gold stocks next week and as they will have been recent star performers they will probably accelerate the XGD's performance.
My 6000 target for 2016 doesn't look so distant now does it? Just 1100 points, just 22%. Might do it in July!
To put this in perspective, this little table from the Dawes Points universe of 22 key gold producers says that at 4890 we have the index on about 6x earnings at A$1770.
I have even added a line for A$2000/oz which gives just 4x earnings. Again a higher gold price gives a higher A$.
This actually gets a lot better.
Whilst this universe is the same one I have used for almost 2 years it is soon going to get a boost from another 30 emerging gold producers I have identified and am monitoring.
Then we will be having some real fun!
As pointed out in the last Dawes Points on gold, the strategy has been to select the prime opportunities in the key geological regions and stick with them whilst keeping an open mind on new emerging opportunities.
Stay the course. Hold those incomparable core stocks and wait for the rest of the world to catch up with what we have known for quite some time.
I am in Singapore just now and have been blown away by the wealth, the architecture and the art work. Man's creativity is being displayed so well here as it is in so many parts of Asia.
This period of global prosperity has a long way to go.
Take the Bifurcation Highway and enjoy the smooth ride!
I had hoped this 50th edition would be a blockbuster but I am on holiday now so the world will have to wait!
Barry Dawes
F Aus IMM MSAA
`As a Post Script and a consideration of `What if', you are all aware I am sure of the plethora of lithium wannabees and graphite promoters on ASX seeking to capitalise on the disruptive technologies associated with power storage in new generation batteries. This is a very exciting development.
Well as an alternative you could consider a company LWP Technologies which has just entered into a JV to develop an Aluminium-Graphene battery that has characteristics that if successful could leave lithium graphite behind.
Look at these specifications:-
Here is the link to the full presentation.
I own LWP and introduced this technology to LWP.
#50
27 June 2016
I own or control in diversified portfolios most of the stocks mentioned here.
Barry Dawes
Head of Resources
BSc F AusIMM MSAA
Follow me on Twitter @DawesPoints 
Indeed, this Dawes Points rate of change indicator recently predicting the upturn very nicely.
The impact on iron ore was likewise just as predictable as the anticipated restocking proceeded. A major rundown in inventory of steel product and ore itself by the steel mills needed to be corrected. The huge volumes on the Dalian futures market also showed massive short covering by speculators and so it went. Record and rising imports of iron ore show inventory ratios are in fact quite low.
I stuck my neck out and suggested we would see US$80 soon. We almost saw US$70 in late April before it pulled back. I am sticking it out again to say this market has bottomed!
This view of steel is helpful especially when combined with this indicator below of metals consumption essentially confirming the continuing consumption strength and clearly no buildup of terminal market inventory. This does not suggest a metals bear market. This says to me less than one week LME inventory.
It says as the sentiment recovers, the demand will quickly absorb this and much more. Much higher prices are coming in the years ahead.
Commodities everywhere were sold off in a frenzy that never truly reflected the underlying supply and demand. Oversold and ready for a very strong rebound.
I come back to technology and I see it everywhere providing minor and major benefits to producers and consumers in so many areas. Computing, telecommunications, innovative power generation, new high performance technology materials (graphite/graphene, lithium, cobalt, scandium, rare earths, titanium, copper, niobium, antimony and much more), automobiles, military technology, space technology, aerospace, consumer electronics), fintech, meditech and the list goes on. And the new technologies are coming from many sources:- the US, China, Israel and Australia.
I think it will also be very important in the next major upleg in global markets that it might actually be driven by the newly wealthy Millenials as their Baby Boomer parent/grandparents shuffle off this mortal coil and pass on their stocks and bond investments. The old industries and dangerous boring low yielding government bonds will be jettisoned to provide the capital for the next leg.
As ever, it is necessary to heed the markets and not the commentators.
Have look at this long term NASDAQ as it is about to break through the old 2001 highs. This very oversold despite recent strength and after a year of consolidation. Looks powerful!
But then look at the Dow Jones 30 Industrials:- It is again challenging recent new highs.
The S&P 500 also looks very powerful, oversold and seems coiled like a spring and ready to go.
The Russell 2000 Small Caps shows similar positioning.
And with the market breadth of the Wilshire 5000 this looks perhaps the strongest.
With the US reporting record sales of automobiles and having strong housing where current levels are still below the required 1.5m dwellings per annum - and are probably still 6m dwellings short:-
The Philadelphia Housing Index thinks so too.
And it seems the Banking Sector is loving it!
Does this look like the end of the world described by those very long the global bond markets and cash?
But let's now follow the action around the world by just looking `East' at Germany and the DAX:-
Then the FTSE:-
Then to Asia with India leading:-
And Japan still OK.
The China Shanghai hysteria in 2015 was just hysteria all along as we suggested:-
Hong Kong is OK.
And Sth Korea looks magic.
Even the Philippines is on track.
I can only conclude that the basic thesis of a global boom is still very much on track despite all the recenty increased doom and gloom mongering.
Back at home the evidence is breathtakingly brilliant!!
The Bear is well and truly dead!
The Bull is alive and gaining strength for that +15 year run.
The Resources sector continues to increase market share of All Ords turnover and there is a new spring in the step of the broking community.
It is all happening again out there and from my sector point of view there is a great backlog of capital raisings in the junior resources sector.
My theme of the past 18 months has been that gold is leading the whole global reflation and that Australian domestic gold producers are showing the way.
This graph should bring joy to the hearts of those in the Australian resources industry!
What great indicators these market share graphs are!
I think it is getting very close to a major break out in all major equity indices.
The themes on economic growth, strong equity markets, peaking bond market, good commodity consumption figures, no inventory and a rising gold price etc are all coming into place.
We haven't wavered in our steadfast views and the portfolio results prove it.
Stay with me or join in now to the massive wealth creation of the next decade.
Contact me 
The Dongfang Modern Agriculture Holding Group IPO has provided an excellent window into China to see how its domestic economy worked. DFM.ASX is now pushing A$1,000m market capitalisation after reporting a better-than-Prospectus forecast figure of A$90m.
DFM Share price chart.
DFM is now the market leader with around 2% market share of citrus harvesting measured by revenue through the sales of almost 250,000tpa of tangerines, navel oranges and the now very chic pomellos. It is a relative giant in a highly fragmented industry of citrus production and harvesting.
Dongfang has a market of 1,400m potential consumers and should be able to capture more of the market through organic growth and acquisition.
China has a very high savings rate and household bank deposits of well over RMB100 trillion (~US$17tn) so it could be expected that Chinese household expenditures will continue to rise into ever higher levels of consumer affluence.
The higher disposable income supports a higher consumption level of fruit and protein (as meat, poultry and seafood) at the expense of grains.
Property in China provides another very interesting aspect of economic transition.
China builds new cities to provide new production facilities and to accommodate retail, industrial, commercial, office and residential activities.
These cities are well planned with roads, rail, power, water and other infrastructure established ahead of time and the residential accommodation follows.
Residential complexes need food and consumer retail establishments as the people move in.
We all should already be aware of the speed with which these Chinese buildings are erected and completed with 24/7 construction at rates that in Australia we might only dream about.
We should also be aware of the market demand in many of these regional areas surrounding second and third tier cities. Strong, without the speculative element seen in Beijing, Shanghai and Guangzhou (Note that Shenzhen property prices are again at all time highs).
Sichuan Taifeng has been running its Zigong real estate operation since 2001 and currently has around 130 staff, and is a major developer of office building, convention centre, shopping centres and large scale residential property in Zigong. It currently has 18 buildings under construction in Zigong with development costs of over CNY 1.2 billion (AUD $265m).
Sichuan Taifeng specialises in property developments that add value well beyond the simple construction process and any commodity residential apartment development.
The Yantan New District is well established and a new shopping centre is being built to cater for current population of 30,000 which is planned to grow to about 60,000 over the next three years.
Aerial view of building site showing Yantan New District with Zigong City across highway in top left
The development is close to the centre of this new district and will be the Zigong GuoFeng Farmers Market consisting of 40 ground level retail shops, a second floor level of 500 local farmer fresh fruit and vegetables produce stalls, two stories for larger scale commercial development and a fifth floor for office space in a 5 storey shopping centre.
The site is just over 9,000m2 and all ~17,500m2 of commercial property will have been sold on completion.
Artist Impression of the Guofeng Farmers Market
Surrounding new apartments in New Yantan with site in foreground
The total cost of construction is set at around A$20m and the sales are estimated conservatively at A$37m (conservative assumed prices at the time of completion of around 25% lower than current have been used) to give a net A$14m and an actual cash surplus for distribution of A$17m.
Should the average sales prices be at current levels the total sales revenue would be almost A$10m higher and the gross after tax position would be about A$7m higher.
LCG has an option to acquire a 51% equity interest in this development of the shopping centre from Sichuan FuChuan Property Co Ltd ('SFP'), the private company that owns the project.
LCG's 51% share of the base case net after tax returns would be A$6.6m or A$0.15 per share fully diluted.
Site earthworks and excavation for the foundations and basement have commenced. Sale of `strata' commercial space is expected to begin in the September Qtr 2016 which will allow additional bank funding and above ground construction to commence. Completion is expected by March Qtr 2018.
On appropriately conservative weighted sales prices that are 26% below current market levels the successful completion and sale should result in a Net Tangible Asset value of A$0.23 for end FY2018 and after retained development capital should be able to distribute A$0.15/ share in unfranked dividends.
The IRR would be very high and well over 50%
Details are provided in this
Nickel is bottoming and reversing.
Nickel is fascinating to watch. Nickel pig iron made from laterites in Indonesia and the Philippines has provided the stainless steel market with contained nickel units (one unit = 1% = 10kgs per tonne) at a discount and iron units for free. The rapidly growing 200 series of nickel alloys prefer nickel pig iron. Why bother with expensive and expensively refined pure nickel metal?
All this may now be changing and should lead to a recovery in nickel prices. Reduced nickel pig iron supplies and already reduced stainless steel inventories have kept the market weak. However, restocking seems to be underway and just might bring about a sharp rally in nickel price. The share market seems to think so. Look at all this:
Guess what I have been doing here.
The leading second liners in the Resources Sector include IGO, OZL, S32 and WSA. I have been buying these last two along with the big three RIO, BHP and FMG.
WA produces around 70% of Australia's gold output of around 280t with the Yilgarn around Kalgoorlie providing about half of WA's 180tpa. From this it is clear that Kalgoorlie missed much of the 2003-2010 Gold Boom but is now making its mark.
I hope you are now fully aware of the importance of the Zuleika Shear Gold Camp. The Gold Camp concept is unfamiliar to the Australian gold industry nowadays. I understand it as multi company operations along a structure of numerous mines.
This hasn't really happened in Australia since the 19th Century when we had Bendigo, Ballarat, Charters Towers and maybe Hill End. Most major WA mines have been single mines with single companies so the Zukeika Shear is of MAJOR significance.
Zuleika Shear at Kundana fits this Gold Camp concept well. Northern Star has the East Kundana JV (Hornet, Raleigh, Rubicon and Pegasus) and its wholly owned Millenium while Evolution has Frogs Legs, White Foil and the Phoenix acquisition. Torian (TNR.ASX) has many of the bits in between.
Note the difference between the narrow high grade K2 Shear deposits associated with black shales (including Pegasus-1.2moz @ 11g/t, Rubicon, Hornet, Frogs Legs -1.3mt @ 6g/t, Millenium etc) and those in dissipated lower grade deposits in more porous rocks closer to the Kunanalling Shear, being Castle Hill and White Foil.
Long Section of Kundana portion of Zuleika Shear
(This is from NST's outstanding good website – see Our Assets/Kundana and entry to this brilliant interactive 3D model at the bottom of the page)
You should also be aware of Northern Star's latest comment on EKJV – Rubicon- Hornet-Pegasus join at depth with over 2km in strike. 3moz endowment to 600m (1.5moz mined) and extension probably to 1800m with another2-3moz at ~10g/t. 200kozpa probably going to 300mozpa. (No wonder 37.5% JV partner TBR jumped 40% to A$5.60. How about TBR's 140koz in the vault (@A$1600/oz =A$225m = A$4.50/share) and growing 100ozpa at A$600/oz AISC managed by NST so A$100mpa pretax (~A$2/share = A$1.40 A/tax EPS PER <3x)) with mine life of at least ten years– is anything cheaper under the sun?). Forget the idiosyncratic management issues, just enjoy the ride. We have!
Is there a better gold mine region in the world today? >3moz @ ~10g/t!
Northern Star is the pick of them all but the market hasn't fully grasped this yet. NST told me It seems many major IB analysts have made recommendations with even contacting the company let alone having visited the mines.
Evolution has also hit the jackpot with the acquisition of La Mancha and Phoenix. And most think Lake Cowal is the most important because of its low grade open cut long life.
Have a look at these:--
Historic Gold Production
Growth in Contained Gold in Resources
Two magnificent companies in NST and EVN with TBR and RND as carried partners and one tiddler along for the ride- TNR.ASX. Can it get any better?
While clients have done well in NST, EVN and TBR (and of course BLK, DRM, GOR, OGC, MML, SBM and RSG – we also flagged DCN a year ago and watched it do spectacular things) Paradigm has also done capital raisings in four small golds:-
AUC Ausgold – Doing a Gold Road on the Katanning Trend east of Perth and near Boddington
SWJ Stonewall Mining- An outstanding small cap in Sth African goldfields off the Witswatersrand
CYL Catalyst Metals - finding another Bendigo - 32moz potential – impressive shallow high grades
AHK Ark Mines – Feeding 30koz deposits into tolling mills to give
All are extremely cheap. Lots more coming.
The Australian domiciled companies with operations in Australia have consolidated recent strong gains whilst the Australian domiciled companies with offshore production have played catch up with recent good performances by RSG, TRY and PRU.
And gold itself is looking exciting too. Doesn't this look good!
And the Wave 3 in the Philadelphia Gold Index is truly underway now to new highs in a 15 year + bull market. This is truly spectacular. Time frame is 1984-2016 here.
And the short term as shown by the GDX ETF shows the downward sloping wedge and the upturn on massive volume
Please note the time frame from the 2008 highs, the GFC lows, the 2011 irregular rally to new highs and the nearly five years of tortured decline. Almost eight years of bear market (2008-2016) following eleven years (2000-2011) of rising US$ gold prices so expect +15 years of bull market to come yet!
Getting a bit pedantic here but resources/commodities really peaked in 2007/08 and only gold, copper, tin and iron ore amongst the major commodities and gold stocks made new highs in 2011. For most things resources, 2011 was a not a happy time and was just a relief rally in the decline from 2007/08.
Keep in mind that the US$ gold price peaked on 21 Jan 1980 and the ASX Gold Index peaked over seven years later in mid-1987 so don't get caught up mixing gold price and gold stocks.
Trying to put it all into perspective
Very long term DOW-Jones. Does this look like Crash Scenario? Maybe just hold on to your hats because we may have lift off very soon!
China Is looking good The Hysteria was just hysteria
China risk is declining rapidly as the country moves away from SOEs and a more entrepreneurial China takes over.
That 8-10% pa growth in personal disposable income coupled with the highly fragmented nature of most of its industries means that rationalisation, aggregation and consolidation will continue to add to economic growth for decades.
Here in Australia the Dongfang Modern IPO has been spectacular! What can you say? A$90m earnings was 20% above Prospectus forecasts, paid a higher A$0.05 dividend and is up 148% on the A$1.00 IPO issue price. Will it rise another 4% this month to hit A$1,000m market cap on 11x EPS?
We still hold almost all our stock here at Paradigm.
We also supported Patersons' JC international China IPO. Up 30% on the issue price and on 5x EPS.
I have another with Living Cities property development in the western city region of Chengdu. Join in for the ride. About 1.5x pessimistic case EPS FY17.
All these show opportunities of growing in an inconceivably large economy that is continuing to boom. Even the bearish IMF has recently upgraded its outlook for China from 6.3 to 6.5% for 2016. Does anyone really listen to these Euro-bureaucrat turkeys?
India Ready to move up again after 12 month correction
FTSE UK coming up to something special
DAX Germany looking good.
No Crashes here!!
Just the major ongoing BULL Market as 3500 million people in Asia want improve their lives.
OIL SECTOR Strong bounce suggesting much more
Big Oil in the US suggests the worst is over as well.
So things in Resourcesland are looking well, BRILLIANT, and so you expect further Equities Explosions as the Gold rally encourages short covering in so many areas and will lead into our Global Boom.
THE A$ - SO MUCH MORE UPSIDE TO COME
- THE POLITICAL PRESSURE DEVELOPING WILL BE EXTRAORDINARY
Barry Dawes
BSc F AusIMM MSAA
Following the share of market turnover of the ASX S&P 300 Gold Index has been a very useful task with this indicator giving us a great deal of confidence in the Dawes Points views.
So have a look at this! The Gold Sector made up 14% of ASX AllOrds turnover in the past 2 weeks and the 5 week moving average hit 12.6% while the 12 week is 7.5%. Astonishing!
I was happy that the downtrend had broken but the moving averages of the last peak in the sector have just been left behind.
There is a massive need to BUY! The market is drastically underweight.
The Index is only just starting to move and this break above 3000 should get close to 6000 in 2016.
And the Dawes Points Gold Index corrections chart is suggesting a massive rally is about to unfold.
The driver is primarily that gold stocks are still very cheap against the A$ gold price.
The Australian stocks are leading their North American counterparts but a high volume break out also occurred last week.
And I hope you recall this very long term graphic of the Barron's Gold Mining Index back to 1940.
And the North American stocks are trading at less than 25% of previous 25 year history. (plus graphic)
Gold stocks will outperform gold and probably almost everything else for the next few years.
The portfolio gives everyone a mix of size, liquidity, dividends, growth and risk so I am very happy to reinforce the selections.
Newcrest has more gold resources than anyone else and improvements will allow resumption of dividends. Northern Star is just brilliant and Oceania Gold has some excellent leverage. Evolution has acquired a massive swag of gold resources over the past couple of years and will be a big player in the Zuleika Shear zone.
These stocks will be the dividend paying cornerstones of every pension fund for the next decade.
Blackham will continue to please everyone for quite a while and my target of A$1 in my research report in early 2015 stands firm. This is a potentially very long mine life play.
Doray, Saracen, MetalsX and Gold Road among the developers are flying.
Tribune is outstanding and the market place will soon cotton on to the significance of Pegasus and the East Kundana JV. Its 140koz of gold bullion in the vaults currently worth over A$4.00 per share is an added golden bonus.
The offshore players of Medusa and Resolute are just too cheap.
The smaller growth players look very exciting and will be happy to talk to anyone about them.
There are of course many other attractive gold stocks out there( like Dacian Gold and Perseus) and they will be covered soon but let's just stay focussed for now.
And the Australian Gold Sector is leading the world out of this miserable pricing time. Gold stocks, gold, metals companies, industrial metals, technology metals, then oil, oil and gas companies and the bulk commodity producers will follow.
So participate in the gold sector now with a good portfolio approach and let's have some real fun.
I own NST, NCM, GOR, DRM, MLX, CGN, TYX, TBR, BLK, TNR, MML, RSG, GEE
8 February 2016
Edition #45
Similar but still nascent changes seem to be underway in ASX Small Resources and also in the XMM, with prices still falling but volumes and market share increasing. All good tentative signs.
The Dawes Points 3 December 2014 untraded gold stock portfolio provided a 73.6% return for 13 months to 31 December plus almost 2% in dividends.
Here is the proof.
Great gains by overweighted leaders Northern Star and Evolution together with half weighted emerging companies Blackham, Saracen and Gold Road gave the portfolio most of the performance and it outperformed the ASX Gold Index by about 20 % points in value and about 0.5% in yield.
It is easy to say that the local gold sector has done well because of the weaker A$ but the A$ gold price has been around A$1,500/oz for the past five years. The recent moves above A$1,600/oz and last week's surge to A$1,588 will certainly help sentiment.
The gold price at A$1,500/oz has made good earnings for many companies and I expect that the Dec Half of 2015 will bring even more gold production growth, lower operating costs and higher earnings.
Expect many gold producers this month to put out early advice of good production stats ahead of the formal quarterlies.
But it is not just the A$ gold price that has made these good market performances.
Real effort, ingenuity and investment is involved in this local industry and here is where the industry is going with the production growth results very clear in WA which has consistently produced 65-70% of Australia's mined gold.
The longer term appears robust for all Australia.
In assessing the Gold Sector Portfolio, emphasis was placed on the S&P ASX 300 Gold Index to ensure investors were looking at visibility and liquidity for most chosen stocks.
However, since the ASX sold its index business to S&P the resources market has never been quite the same. The Gold Index was discarded and not resuscitated until about 2005 and then was backdated.
The actual XGD Index was recently critically reviewed by Dawes Points to analyse its effectiveness.
This index has been found to be an appalling collection of gold, non-gold, local and foreign listed stocks that gives no real reflection on the activity in the Australian gold industry of the past decade.
So coming to the real action in the ASX Gold Index today we have a tale of two sub sectors:-
Domestic gold producers; and locally domiciled companies with offshore gold production.
The ASX 300 Gold Index currently has 22 stocks. Ten are gold-only plays domiciled in Australia and operating mostly Australian gold mines. Eight are Australian domiciled and operate mines offshore. Two are foreign domiciled and have all or mostly foreign gold mining operations. One is a diversified miner with local gold production and one is a diamond mine developer.
Look at this.
First of all, note the June 2013 low that I have often mentioned! An unweighted index of up to ten Australian local producers is up 165% since that low.
The eight offshore producers are down exactly 50%. The Index itself is up just 28%.
Where did you want to be in this index? Clearly with Australian gold companies producing locally.
The other four stocks in this 24 stock universe have little or no relationship with the Australian Gold Index.
What a misallocation of resources. What would be the interest in ASX gold stocks be if the ASX Gold Index actually reflected these strong gains and the activity in the Australian gold industry itself!
ASX investors should be able to invest in confidence in Australian companies involved in the gold industry.
Australia is the second largest producer of gold, after China, and the opportunities should be large and many. A decade ago, almost two thirds of Australia's gold production was owned by overseas domiciled gold companies. Recently, substantial gold production assets have come back to Australia through sell downs and acquisition by Northern Star, Evolution and MetalsX.
Everyone should be investing in this production growth and not, as suggested by the ASX 300 Gold Index, in some foreign domiciled offshore producer and certainly not in an offshore uranium prospect. Or in a coal miner, iron ore producer, or a gas company.
Actually, the story of these Australian gold producers gets better.
These terrific ten Australian gold producers make up over 90% of the XGD turnover and as noted above this is now back up to around 2% of All Ords turnover.
Makes the current makeup of the XGD Index look silly.
Well, my 2016 portfolio will still emphasise most of these top ten (eight actually) with a few more that should soon come into the XGD:-
Only three of the offshore producers make the grade for the portfolio.
I have added some emerging stars to give us the Dawes Points 2016 Gold Stock Portfolio for a A$100,000 portfolio. $40% in the larger stocks, 30% in mid caps, 20% in growth opportunities and 10% in minnows.
I am taking the 31 Dec as the start date so let's follow the performance over the year and compare it with the 2015 Portfolio.
I would like to refer to two other minnows that wouldn't fit in the Gold Portfolio but could provide some excitement in 2016. Mustang Resources (MUS.ASX) has some very high quality projects in Mozambique that include rubies and diamonds.
Alt Resources (ARS.ASX) is a recently listed explorer with an outstanding copper porphyry target near Cooma in the Snowy Mountains on NSW.
The US Fed has begun its interest rate hikes as that economy strengthens. The evidence is clear that this is a sub normal recovery but the deleveraging has been substantial at personal and government levels and even the US Budget Deficit seems to now be 40% lower than just a few years ago. Savings rates around the world have improved balance sheets everywhere. The US$18trillion debt is still there but the bond market is still signalling that higher yields are in store over the next few years.
Rising bond yields after such an extended period of easy money will be reinforcing the probabilities of the end to the deflationary days and a pick up in inflation.
Over US$90trillion of capital is tied up in government and corporate bonds. This is a massive source of capital and when coupled with the global cash levels, there should be strong flows of capital out of cash and bonds to gold when sentiment changes.
US 10 Year Bond Prices - Weekly
The market for gold is now driven by the Love Trade for jewellery in India and China and is likely to do so for quite some time.
From this graphic it is easy to see that most of the world's 170,000 tonnes of gold is held as jewellery and demand for gold into India is insatiable.
China in 2015 according to Koos Jansen at Bullion Star had another record year of imports (~1,200tpa) and domestic withdrawals (2,405t ytd) through the Shanghai Gold Exchange.
World mine production is only about 3100t so between them China and India absorb all mine production.
Coin demand remains robust and silver coins mint production in North America has maintained the very high levels of 2013 and 2014 to meet this strong demand.
This Supply and Demand for Gold for the Next Ten Years strongly suggests a tight market for gold will exist for quite some time.
You will be familiar with graphics of the Philadelphia Gold Index (XAU) that is showing an index level that is almost as low as that at the US$248/oz low in 2000.
My reading of this indicates we are near the lows in these major North American gold stocks and if the market is completing the Wave 2 correction then the upside should be strong and should follow what we have already seen in the Australian Gold Production Sector above.
The market is currently all about sentiment and the sentiment has not yet turned favourably towards gold but that change cannot be too far away now and the response could be rapid.
This strong view for North American gold stocks is supported by the very long term graphic for the Barron's Gold Mining Index which goes back to 1940.
An excellent long term uptrend is matching support of 2000 and is also about the same as highs in 1969!
Readers will probably be also familiar with the XAU vs the S&P500 whereby gold stocks there have fallen 90% against the S&P500.
We can look again at the S&P500 against all commodities (CRB Index) and extreme is the only word that can apply!
And market sentiment shows it very well.
Finally, four major indices that don't look as if they are about to crash.
Markets are always difficult to assess but true value always wins.
You can contact me at 
Iron ore has seen a 50-60mt global stock drawdown while crude steel output has remained firm. Port stocks have fallen back to 80mt after reaching 110mt earlier in 2015 and steel mills’ stocks are well down. Some restocking is coming.
Then we look at some other simple data like Qtly annualised GDP growth and Indexed GDP. No economic collapse here.
Source: China National Statistics
And then something even simpler as average annual personal disposable income in China. At <5 RMB :A$ this is ~A$6,000pa in the cities and just ~A$2,000 in the country.
Source: Dongfang Prospectus
China is growing and its citizens are becoming wealthier.
Diets are changing. More protein. More fruit and nuts. And less cereals.
Source: Dongfang Prospectus
So demand for higher quality, unadulterated, clean healthy food is rising. So are prices - as demand can’t match supply and flows into imports.
Source: Dongfang Prospectus
You are all familiar with the 100m people moving from rural areas to the cities. Well you might like to imagine that farm food output suffered somewhat and led to rising food prices. The PRC government, eyeing their remaining 800m farmer supporters, reacted as true agrarian socialists by exempting agricultural food production from Enterprise Income Tax and personal income tax and VAT. At least until 2025.
So now you have a major market of 1400million people that just wants more and better food.
Having 800 million individual farmers means a lot of individual farms. Try about 10 million!
So lots of little inefficient farms. Fragmented industries I think is the term.
Now how to play it.
Here we come to Dongfang Modern Agricultural Company.
Could it get any better?
This company was set up in 2005 and in 2008 the current Chairman injected about US$6m to acquire an 89% holding.
This was the last capital injection to the company. No more equity and no debt at all.
The plan was to acquire as many plantations as possible and by 2012 it was 9 plantations over 4500 hectares and by end 2015 it will be 19 plantations over 9,000 hectares.
In calendar 2014 DMF earned RMB 315m ( ~A$56m) and in 2015 this should be over RMB 370m (~A$75m but over A$80m at the current exchange rate). How many Australian companies make this amount of earnings? And at a 43% margin? Without any debt?
The company acquires uncapitalised plantations from village cooperatives and manages them professionally. It then takes the products that were generally suitable only for local town markets and sells them in high volume premium markets in supermarkets and hotels for double the price.
Margins are over 40%. And no tax.
The villagers are happy. They get to sell or lease out their plantations and still get to work as harvesters.
The PRC government is very happy because plantation productivity is significantly better and output is rising. Food quality is improved. Food adulteration risks are lowered. Imports reduced.
Shareholders are very happy because the returns are strong and the risk and volatilities are low.
The returns on paid up capital of just ~US$10m are huge while the returns on shareholder funds which includes RMB 1,000m in retained earnings (~A$180m) are over 30%.
Can you find a better company track record anywhere? In any industry?
Taking the next step, DFM is the second biggest producer by revenue of citrus in China. Produces over 200,000t with just over half being tangerines (mandarins to us) - which is more than Australia’s total of mandarins.
It has about 1.1% market share in these very fragmented industries. Aims to have a much bigger share over the next few years. Wants to be the market leader.
So there. Market leader in the world’s largest and rapidly growing consumer market producing a consumer staple that is in rising demand.
High margins, PRC Govt support in almost everything it does, no debt, and 10-15 years of growth ahead.
What more do you want?
The Shanghai and Shenzhen markets are volatile but have a look at some more sedate alternatives. These ETFs might give you a better idea of listed stocks in China. Not overextended.
I can only conclude that those who gave us warning of the US Greater Depression in 2009 and the Collapse of the European Banking System (over 2009-2015) are just as accurate on the Collapse of China (2010-2015) and that over the next 12 months all those in the market places now sitting on vast hoards of cash (A$17.17bn here in Australia, >RMB 100Trillion (US$18tn) in China and so on all around the world) will be in buying all these stocks.
Stock markets have been climbing a wall of worry for years now and many investors are out.
Many funds are loaded up with ridiculously overpriced and very dangerous bonds or are sitting on mountains of cash.
Meanwhile, so many indices around the world are at or very near all time highs while the bears keep calling the next Crash.
And just think. Half the world is already sitting cautiously in these highly defensive investment positions and 10% has been (we in the Resources Sector)thumped by falling commodity prices. 40%, especially in Asia, is just having a great time. Corporations also have mountains of cash too.
And just like Sydney property sellers are finding, the supply is just not there to quickly get back into the market.
So think about China just beginning to hit its straps as hundreds of millions of increasingly wealthy consumers demand more and higher quality products. And as industry and commerce utilise all of China’s amazing new infrastructure that is assisting with the consolidation of its many internal markets. We are seeing the rise of hundreds of well positioned growing companies who are just totally unaffected by what Janet Yellen thinks.
Dongfang Modern is one that the ASX is lucky to get and I am sure there will be many more quality Chinese companies offering ASX investors an eye and a dividend link into China.
So don’t delay. Fill in that application form or contact me - 
Source: Ipsos Report - Dongfang Modern Agriculture Holding Group Prospectus
China and India populations are also buying more gold and silver.
So who now owns the gold and who will be making the rules?
The demographics of the West are strongly influenced by the Baby Boomers who grew up in a rapidly changing world that was actually a slipstream sucking them in behind a World War II-depleted generation of cold-reality shaped stalwarts and but then the BBs also graduated into a generation of the Lyndon Johnson Great Society of publicly funded under-achievers.
The initial gains were spectacular but the aging hippies and their uninspiring Generation X progeny gave us all massive government spending, Budget Deficits and the Welfare State. And generations of reactionary bureaucrats.
For us unreconstructed Baby Boomers, the 1960s and 1970s were a time of revolution in thinking after the conservatism from the Great Depression of the 1930s and the upheaval of World War II in Europe and in the Pacific. The Depression said money was hard to come by and your savings were hard to hold on to and then WWII said that your life and personal safety, as well as savings, were hard to hold on to.
Lord Keynes in the1930s with his Deficit Spending backed up by some US attention seekers announced to the world that `Government’ knew better and it could invest OPM (Other People’s Money – yours, as the Taxpayer) better than the people who earned it, i.e., you and corporations you might have invested in.
The Revolutionaries of the 1960s and 70s are now the Reactionaries. And their children too. Governments and quangos and NGOs all wanting to tell you what to do and how to do it. Using your tax paid dollars of course. Groupthink and consensus overruling facts and natural evidence.
And calls for an inquiry on iron ore. For heavens’ sake. Dawes Points set out precisely in early May what was happening within the iron ore market. The expected short cover rally is now underway. How far will it run? The bureaucrats are wanting to be heard now but the horse has bolted. Yet another thought bubble.
But perhaps the people overall have their own special way of responding to the uncertainty . Building up cash deposits. It is truly fascinating how people everywhere have taken to building up savings. Inventory of Money. Conserved labour. Private Savings. (And in contrast, Public Profligacy). This Inventory of Money has come up often in these Dawes Points. As does flow of funds. These funds will need to flow!
Now with that flows of funds. Recall that we have gargantuan annual expenditures in USA (US$3tn), Europe (Euro 2tn) and here in Australia (~A$430bn(US$320bn) Federal Budget Expenditures) with deficits that add annually to the debt burden. Funded by bond sales. Government bonds now have higher yields than corporates!
Dawes Points has been talking about the bond markets for some time now but I hope you have noted what has happened in the major bond markets over the past couple of months? A volatile top and then carnage! The bank shares are following.
Just think about bond prices. The lower the coupon the higher the volatility. Doubling in yield. Halving in price? Well, not quite but horrible anyway. And much more pain to come.
Germany 10 years are now 0.88% after falling to below 0.05%! And the UK has blasted through 2.0% after seeing 1%.
This next one has to be one of the great technical graphics in my investing life! US 10 Year Treasury Notes by price. The peak in 2012. The break of the break of the uptrend in 2013. The rally in 2015 back to the trend break line for the `goodbye kiss’ then a sell off! A break through about 122 (but probably 125!) might just put the fear of God into the `safe haven’ believers. The falls this past month have been truly horrendous. No wonder banks stocks are weak. Keep watching this key indicator because it is not yet “oversold”!
US$85-90tn in useless overpriced global sovereign debt. And more coming every year. These graphics on US, German and UK bonds should be telling YOU something LOUD and CLEAR. Disinflation is over. The central banks want some inflation and I just think they are going to get it. Maybe bigger than they expect.
And what does Dawes Points think of rising bond yields?
Good news!! All time highs in equity markets! Almost everywhere but here in sleepy Oz. A nation of bureaucrats chasing bank shares.
Funds will be flowing out of these bonds (and bank shares) now. Where will they go? General equities of course, then resources shares. Then gold and commodities. Let’s just watch this play out.
The oil price as expected has decided that low is no use to anyone and China’s 5.4% pa June Half 2015 gain means another 0.5mmbbl per day consumption. The glut might just be over in the Dec Half and oil prices could be higher.
And while we were talking of the build up in bank deposit holdings we can also already see the build up in gold holdings. Certainly underway in China and India.
Do you go along with that rising interest rates will sink the global economy? Possibly that might happen, but the markets are telling you differently. The US$ may have a last gasp rally and the fraudsters on COMEX may try to hit gold and commodities again but it will be futile.
Recall the LME metals graphics in the last Dawes Points. Consumption growth rates that even surprised me with their strength. And no LME inventories. Thank goodness we are going into Northern Hemisphere Summer otherwise the commodities would be surging already.
Just come back to LME inventories. Other stocks do exist but LME stocks are a helpful indicator. The composite is at just one week and some of the individual metals are below. Copper, lead and tin are down to just one week and zinc is less than two and falling rapidly. Stocks of Nickel metal are at an all time high but this is disguising a major shortage developing in nickel-rich iron ores in China.
And China crude steel production is still confounding the doomsters. 838mtpa in April 2015. Up just marginally on 2014 and the second highest rate ever! Iron ore inventory movements will be so important to watch and will strongly influence iron ore prices. Expect a rally to US$80 by year end.
There is just so much more to come here. I hope you all have an understanding of the significance of the Chinese Silk Road Infrastructure programme and the Asian Infrastructure Investment Bank. No slowdown in China and acceleration in ASEAN and India.
You have seen how the probable iron ore short squeeze as suggested in the last Dawes Points is materialising. It might be one of the largest volume global markets but it is still a very thin market for traders.
The inventory shift highlighted there has seen China port inventories down over 25mt (~20%) to <85mt.
So the basic fundamental supply/demand data is overwhelmingly positive and a commentariat environment has been created that is overwhelmingly negative.
I am seeing dozens of small resources stocks attracting good volume and recovering stock prices. The opportunities are many. Companies with decent projects trading at a few % of their NPVs and are just awaiting funding. Producing companies trading a low single digit PERs. Explorers with some outstanding results. Technical geological and geophysical evidence is building up for the most extraordinary decade of new major discoveries in Australia in oil and gas, copper, lead-zinc-silver and gold.
The indefatigable Kerry Stevenson and her recent Symposium at Broken Hill has just delivered a focussed insight into the massive potential for new discoveries in central Australia. Knowledge and technology that begets new knowledge and then great wealth. The mining and exploration sectors provide some of Australia’s most dynamic Intellectual Property.
Hats off to the staff from the universities and Geological Surveys of NSW, Sth Australia and the Northern Territory. The base that is being laid out before us is truly exhilarating. Australian exploration will be having a vintage decade.
I hope I have the time to cover this in more detail in the next few months because the implications are vast.
So here is your chance to do very well on most resources companies.
I know dozens of these companies with outstanding operations and projects and there are scores more that I don’t. Many are already up 100s of % in 2015.
Most are too small to even fit within the ASX 300 sub indices but I am seeing improving volumes, increasing market breadth and the rising prices that go with them.
Participation by a broader section of the market place is still not with us, reflecting the fear and pessimism but this has been a very long period of bear market so it will take time to bring this back to normal. That means this bull market will last a very long time too!
Call me if you want to make some real money in the year ahead!
But now however, the evidence can be best seen in the actual performance of ASX the Small Resources and Gold Sector Indices.
Market share of ASX turnover is picking up and the four year-long downtrend declines have been broken. The momentum is now with the Resources Sector.
Have a close look at these graphics and I haven’t done them because they look colourful.
Each one suggests major changes are coming in the markets.
There is a downtrend trend break for the Metals and Mining.
Small Resources had its bottom in June 2013 which is my `low’ for this cycle and many stocks outside the XSR have done very well indeed.
The XGD is showing leadership after bottoming in November 2014.
Gold sector turnover is rising as breadth and participation increases. Appreciate that the ASX Gold index is still down 70 % from its high and is now turning up.
Certainly the weakness of the A$ in late 2014 helped kick the market and some people might have thought it was just an A$ gold adjustment that would soon peter out. Nice jump. Take profits. Now what?
Well it has held its ground and then moved marginally higher.
In my view, the XGD is readying itself for another major move up. Perhaps mirroring the bond markets that seem to be expecting an even bigger thump to come there. Timing suggests mid to late June so you may not have much more time to dilly dally.
This looks very interesting and a break above 2800 could see a sharp rush to 4400 (up 64% from here). Will we get it?
Looking at this index more closely there is much to like.
It is showing intra sector rotation as some stocks have weakened, some have moved sideways and some others have surged.
Dawes Points has its favourites. NST, MLX, TBR, BLK, SBM, OGC, NCM, EVN, BDR, MML, GOR, DRM and CGN.
XGD Gold stocks against A$ gold had fallen 80% from April 2011 to the Nov 2014 low! A$ gold at the low was the same as at peak in April 2011!!
Other sectors are moving up and the takeover of Sirius by Independence Group along with the consolidation in the gold sector should be giving everyone confidence.
And I do like the oil and gas sector. Oil is holding up well with strong demand from Asia and the US output is stabilising or falling.
The thesis in Dawes Points hasn’t changed these past two years even though some things have gone terribly wrong in the A$, the iron ore price, the oil price and…… oh yes, resources stocks themselves.
But the rest of the scenario of:-
Of course higher steel production means more iron ore needed so steel mill ore stocks may actually be quite low. Finished product stocks are also well down over the past 18 months.
And there is nothing here that suggests a decline in imports has happened or is likely.
This is a take on China Port Inventories as a % of imports. 89mt of port stocks is only 32 days at 1,000mtpa imports.
See any oversupply here?
Certainly the world has new iron ore capacity coming on stream over the next few years and you might ask yourself why would that be? Could it be that demand will be increasing and finally Chinese domestic production is sharply declining?
Or is it that the mining companies and their bankers are stupid and just want to blow shareholders’ funds?
We can accept that Chinese steel consumption growth rate declined in 2014 to just over 1% and the increase was the lowest for many years and that China maintained steel output by exporting about 90mt of steel products. But there are many aspects to this equation.
Firstly, iron ore imports at record levels displaced Chinese domestic magnetite production then greater Asia shared China’s steel output. India has complained about dumping of steel but with its own archaic capacity of only 85mtpa and steel demand growing at almost 8%pa then it must be welcoming the opportunity of gaining access to new steel. Per capita steel consumption there is only one tenth that of China. India’s own forecasts are for 140mtpa by 2017 with imported iron ore to figure prominently.
Secondly, East Asia (including China) and India consume over 1,000mtpa of which ASEAN consumes about 80mtpa whilst producing only about 20mtpa.
India wants 150mtpa domestic steel capacity quickly but I am sure it would take lots of Chinese steel now. Chinese steel anyone? Yes please!
Overall ASEAN with its 700m people has a steel use per capita of about one fifth of China. It will take a lot of Chinese steel in the immediate term and then build its own furnaces. More iron ore needed.
The inventory adjustment that has taken place in iron ore into 2015 will probably have added 40-50mt to supply. We have already seen 20mt rundown from China ports. Probably 10mt from the steel mills. Fortescue and other Australian producers have had mine cuts to give another 10mt port reduction. Now that has gone will it be rebuilt and increase demand? And overall global demand should soon pick up as well. But probably not yet for high cost producers.
These inventory shifts could cause a serious short cover rally in iron ore price. Watch this space.
Keep in mind iron ore is an illiquid market and the shorts in the futures market may have some heart burn trying to pick up a few cargoes if the market goes buyer no seller.
All three Australian iron ore producers BHP, RIO and FMG are strong BUYs and recent operational rationalisations by each has only improved their prospects.
And the individual metals. Don’t manganese alloys look interesting! Strongest of all the metals!
Looking at LME inventories over the same period against consumption it is clear that the denominator has risen 30-40% for the LME metals.
Nickel metal inventories have surged wildly as stainless steel producers have sought far cheaper nickel pig iron made from nickel iron laterites. Perversely, reductions in availability of such ores from Indonesia will leave nickel in a deficit very soon. Watch the price of this metal.
Most other inventories have been heading south rapidly over the past two years. Some inventory levels are now very low. Against 40% more consumption they are VERY low.
If we leave out the distorting effects of aluminium and nickel, a composite can be established. This says the average LME availability of these four metals copper, lead, zinc and tin is just over six days (just 1.78%!!!).
This certainly doesn’t say a collapse in demand.
Is there anything in the above that suggests Dawes Points is incorrect in being bullish?
Now just look at copper.
In US$ testing downtrend but in Euros it is already away and will move higher.
Copper in A$ is looking ready for a massive upmove. After a compound annual growth rate (CAGR) from 2000 of 3.21% and 4.58% pa from 2010 in consumption, copper is moving ahead of supply and has only 1.5% of annual consumption as LME inventory.
I have some favourite stocks here but Cudeco (CDU.ASX) is now finally so close to production. Inventories (>200kt) of high grade ore and native copper have been built up ( 
Lead has had a good move up in the past two months and a 14 year CAGR of 3.76% and four years of 2.80% but there is less than a week’s supply on LME. Should be much higher in 12 months.
Nickel has a roller coaster ride with a long term growth of 3.70%pa since 2000 but 6.16%pa since 2010. The appearance of nickel rich iron laterites being turned into nickel pig iron has left demand for metallic nickel high and dry and hence the big build up of LME inventory. The export bans by Indonesia on unprocessed ores have now changed the market balance so we should see a draw down on LME inventories, and if this takes place, nickel prices could surge.
Tin has the lowest long term growth of all the LME metals but the real story here is the requirement for new supply. Nothing much coming, no inventory (down 25% in past 3 months!) and the interesting characteristic of being the only LME metal other than copper that made a post GFC high in 2010/11. Should be one of the better performing metals for the next few years.
Zinc has had a slower consumption growth rate but has moved up strongly as inventories have declined sharply with a decline in supply that will only get worse in 2016. A much bigger price coming here.
These don’t suggest recession is upon us.
And as you can see, no LME inventory buffer is available for these metals.
In Australia this means anything in LNG export or the Cooper Basin or newly developing unconventional is now very cheap.
Ask me about my favourites.
This is finally turning up and it would suggest that over the next two years this means ASX Gold Index should almost double against A$ gold from 1.6x to 3.0x.
Are you bullish on US$ gold? I am bullish on US$ gold but also the A$ so if both rise then ASX Gold stocks will be really flying.
Dawes Points has picked some real winners here from the lows in November and December 2014.
As noted previously, the issues for individual stocks are complex of course but we are talking about stocks still down 70% and in the very early days of a new bull market in gold.
Risk is still low, reward is still high!