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The rise of the small cap resources stocks #70

by Barry Dawes

Key Points

  • ASX.XSR Small Resources Index up 5% for week 6 Oct and about to surge
  • Commodity prices rising
  • Battery metals looking very strong
  • Pilbara 'Wits' stocks providing boom concepts
  • Industrial metals stocks ready to rise
  • Oil and gas stocks offer outstanding value
  • The world still awash with cash
  • All Ords finally through 5,800!
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
The Global Resources Sector is now well on its way to substantial value rerating as investors have their awakening to the perfectly robust economic data from most countries and especially from China and the US.  The whole concept of rising living standards Chindia and ASEAN is coming back to mainstream. Resources commodity prices are rallying and multi year highs have been achieved by zinc, copper, aluminium and lead. Many other positive and exciting actions throughout the broad resources sector are assisting. The lead in this Global Resources recovery has been taken by the Australian gold sector which bottomed in Dec Qtr 2014, a full year ahead of the next sector which has been the large resources stocks such as BHP, RIO, S32, FMG and OZL. The resources sector small caps have had mixed results but recent action, especially the 5% gain in the week ending 6 October 2017 has set them ready for a strong run. Dawes Points has continually pointed out the strength in the Chinese and global steel industries and the positive effects on iron ore. Steel is just a proxy for consumption of all metals and the price responses in copper, zinc, lead, aluminium and tin amongst the industrial metals and even stronger price responses in technology metals tungsten, antimony, lithium and cobalt reflect robust demand, supply limitations and low inventories. Price responses over the next few years should be very strong. This graphic was displayed last month but is still is telling a very strong  story. The world is on track. It is pleasing to see BHP taking up the One Belt One Road Initiative (Belt Road Initiative - `BRI') and pointing out the need for another 150mt of steel for already identified projects over the next decade. The BRI will affect many countries in Asia and Eurasia so it is no coincidence that this graphic of emerging markets is telling us that the recent break out of this portfolio has many, many years to run. And even the Australian Department of Industry, Innovation and Science has entered the commentary on growth scenarios for India for 2035 with >1000mt of steel demand in the high intensity option. Source: Department of Industry, Innovation and Science Some fancy numbers for an India that might surpass China in resources commodity consumption. All these add to the Dawes Points expectation of at least a decade of economic boom to benefit Australia's resources sector. Sorry if this is repetitive but it is happening and the markets have yet to properly value the stocks.  This expectation has been tenaciously held here and has been unwavering. The Australian Department of Industry, Innovation and Science has produced some helpful graphics on various Australian key exports. This one depicts the iron ore markets:- And this one is thermal coal. Note that despite the ravings of most Australian State Governments and the nonsense from so called environmental activists there are 365 advanced technology coal fired power stations planned or under construction around the world.  135 are in India and it will be importing very large tonnages of low sulphur coal.  Where will it come from?  Mostly Australia. It defies logic that closing of coal-fired power stations in Australia will have any impact on global emissions when 100 times Australia's near term needs are being built elsewhere. All this has been excellent for the larger resources stocks as seen by the rises in BHP, RIO, FMG and S32 and as being suggested by Dawes Points over the past year. The Metals and Mining Index has broken its downtrend and has moved higher after its own `goodbye kiss'. This index is matching the Global Resources Indices as mapped by S&P. But more importantly for us is the increase in market share of All Ordinaries turnover and the five week trailing moving average is now above 20% again. So all that is very good for the bigger stocks but now let's just focus on the ASX.XSR which closed at 2342, up 5% for the week. The current 2342 is now finally above the Dec 2008 GFC low of 2265 and the targets I see are over 4000 by end 2018 and 5000 within two years. Note, too, that XSR market share of ASX.XAO turnover was 6% for week ending 6 October! The five week trailing moving average is over 4%. This is a vital indicator and it is so positive. The XSR has 38 stocks of which
Gold companies 12
Oil and gas 8
Battery tech materials 6
Mining Services 6
Metals 4
Coal 2
Total 38
The gold sector therefore has a big bearing on this index. Given that almost all the gold stocks in the XSR are gold producers and about half are paying dividends. Market share of turnover is creeping up again after the last pullback in US$ gold.  Expect this to be averaging closer to 5% in 2018 as gold prices head higher. The ASX XGD Index has not been a particularly good index prior to about the beginning of 2015 and so not surprisingly the XSR isn't too wonderful either. As noted, it has 38 stocks in various subsectors but I would question the inclusion of the 6 mining services companies and it has just 4 industrial metals-related and no iron ore stocks. Also for a small cap index, 15 of the 38 are over A$1,000m in market cap including 5 over A$2,000m.  Just five are less than A$300m. 38 stocks with a combined market cap of $41bn. Nevertheless, I particularly like the oil and gas sector and there are 8 here in the XSR.  The Australian Eastern Seaboard gas debacle will assist gas producers capable of supplying this need and benefit will also flow to WA Perth Basin players.   In addition, global oil demand continues to exceed forecasts whilst US tight oil output continues to underdeliver.  Expect higher oil prices. Also the XSR has six companies in the battery technology resources that cover lithium, graphite and cobalt. Note that lithium producer Orecobre (floated by MPS in 2007) is making >US$6000/t operating margin on its FY18 target of 14,000tpa lithium carbonate and aims to more than double output to 35,000tpa. ORE has a market cap of around A$1000m (is this really a small cap stock?) and has recently made new highs above A$5.00. Orecobre's view of electric vehicle demand is suggesting that the supply of lithium carbonate will not match demand so that higher prices are inevitable. Source:Orecobre The lithium battery market will require supply from many new sources and graphics like this show many players are in the game at differing stages of development.  Opportunities are many. Selection of Lithium Development Project Companies Source: Sayona Mining Ltd Graphite is the other key component in lithium batteries (along with cobalt and nickel) and within that expansive universe of development projects these are some with reasonable prospects. Selection of Graphite Development Companies  Source: Bass Metals Ltd Of the four metals companies in the XSR only one is under A$600m and the two coal companies have a combined market cap of A$5,300m. In contrast, there are literally hundreds of small cap resources stocks with market caps below A$100m and many under A$10m. So these do not get representation in any index but so many are very active. One subgroup that is having its own boom is the new Pilbara Conglomerate Gold Rush that is bringing forth an exciting new concept. The Witwatersrand Gold Deposits of South Africa are the by far the largest gold source so far on the planet.  The gold occurrence is considered to be an alluvial accumulation of gold in thin layers of conglomerate (ie rocks made up of other rocks and generally deposited in some active riverine environment) rocks.  The source of the gold and the actual occurrence of the gold is not yet conclusively determined but it certainly is a lot of gold. Schematic Diagram of Witwatersrand Gold Deposits The global inventory of gold combining all the gold ever mined is around 180,000 tonnes.  About 60,000 tonnes at about 15g/t are considered to have come from the mines of the Witwatersrand and current estimates are that there are another 35,000t as resources and there would probably be another 50,000t that would be unmineable due to depth and other considerations. This is around 150,000t of gold. In comparison, Australia's biggest and best (so far) Kalgoorlie Golden Mile has produced about 3,000t (or about 100moz). The idea of a Witwatersrand paleoplacer conglomerate analogue in Australia has been mooted around the Nullagine region in WA for many years and several groups have explored this target.  Additionally small gold recoveries had been reported along the north west and north east rim outcrops of the basal unit of the Fortescue Basin but no economic significance had been given to these. However in more recent years around Karratha, about 350km to the north, prospectors had been fossicking with metal detectors along a 10 km zone of outcrop of conglomerates and had a reasonable degree of success.  (I have been advised that Karratha has the highest number of boats per capita in Australia.  And the highest number of metal detectors per capita!) Their shallow diggings have actually left a clear geochem signature over about 8km for professional explorers to now follow. This surface rim outcrop is a basal unit of the Fortescue Group sediments. The Fortescue Basin is a mafic (iron and magnesium-rich) volcanic rock dominated sedimentary formation that sits unconformably over the Pilbara Craton.  The basin dips about 3-5% to the south.    The age of the Fortescue Basin is the same as the Witswatersrand basin and the stratigraphy is quite similar. The Beaton's Creek paleoplacer conglomerate deposit at Nullagine was in more recent years actively explored by Canadian company Novo Resources as a Witwatersrand target.  The deposit is multiple stacked alluvial gold reefs and Novo considers it a major target for low cost near surface mining.  Sumitomo has an option to farm in. This project has resources of 6.4mt @ 2.7g/t (558koz) made up of Measured and Indicated Resources of 3.39mt @ 2.7g/t and Inferred Resources of 3.0mt @ 2.7g/t. Novo Resources became intrigued with the success of the prospectors subsequently revised its strategies and over the past year acquired extensive tenement around Karratha. Source: Novo Resources Recognition of a larger scale to these other conglomerates led to Novo Resources acquiring the Comet Well tenements and consequently in July 2017 entering into a JV with Artemis Resources at the contiguous Purdy's Reward tenement which has actual surface outcrop and an opportunity to economically test the concept. As far as the exploration industry is concerned this is probably universally seen as a unique style of gold mineralisation not seen before. Gold nuggets in the shape of watermelon seeds have been found throughout the thickness of the strata.  In addition, quite high volumes of fine gold has accompanied the larger nuggets. A few of these per cubic metre can give you those high grades. Source: Artemis Resources The Witwatersrand is similar but very different. A paleoplacer conglomerate is also known in Ghana at Tarkwa where a very large +15moz gold deposit @ 1.2g/t is being mined by AngloGold-Ashanti.    Conceptual Cross Section of Basal Conglomerates Extending 10km downdip Source: Novo Resources CRA had drilled a 2200m deep vertical hole deeper in the basin in the 1980s and intersected conglomeratic sediments at a depth of 1756m that assayed 11.7g/t.  The important basal units were evidently not assayed. This hole was about 65km away from Comet Well/Purdy's Reward to the south so the continuity down dip is possibly very high.  Keep in mind the dip is only 3-5o. Recent trenching bulk samples at Purdy's Reward provided 67g/t and some further trenching work with metal detectors was beamed live into the recent Denver Gold Conference.  You can see it here. Worth spending 10 mins on this. https://www.youtube.com/watch?v=Z-YK4r6VUoc Novo is now undertaking a programme to further test the surface outcrop with trenching and some innovative 17.5 inch large diameter RC drilling rigs in a two month programme that should provide some definitive answers on downdip continuity by end 2017. Novo is also using some innovative X-ray ore sorting machines to reduce ore bulk and processing costs. Detailed Cross Section of Comet Well/Purdy's Find showing Drill and Trenching Programme Source: Novo Resources The drilling programme will be to confirm the extent of the conglomerate along this section and down dip.  With the nuggety nature of the gold it will be the presence of the conglomerate itself rather than an assay that will be important. Prominent Canadian Gold Producer Kirkland Lake owns the Fosterville mine in Victoria which produced 77,000oz in the June Qtr at 17.2g/t and is rumoured to have found over 500,000oz @>50g/t deeper in the mine.  It likes high grade mines and has taken a C$50m investment for a 9.2% holding in Novo Resources. Prominent Canadian Gold Producer Kirkland Lake owns the Fosterville mine in Victoria which produced 77,000oz in the June Qtr at 17.2g/t and is rumoured to have found over 500,000oz @>50g/t deeper in the mine.  It likes high grade mines and has taken a C$50m investment for a 9.2% holding in Novo Resources. Novo is now cashed up for a big exploration programme and with Artemis also having the 450ktpa Radio Hill Mill ready to start production here or on its own tenements after minor refurbishment. Another ASX gold minnow De Grey Mining has also tenements at Louden's Patch in the Fortescue Basin and has also received funding from Kirkland Lake. Cross section showing orientation of target area at Louden's Patch Source: DeGreys Mining Loudens Patch nuggets Source: DeGreys Mining The potential size of these deposits is without peer in Australia. The Chairman of Novo, Dr Quinton Hennigh, is a highly regarded geologist and his view of the formation of the Witwatersrand was through precipitation of the gold from seawater and this allows for very large areas to collect the gold. The areas covered by Novo's tenements are over 10,000km2  and, like coal deposits or iron ore deposits, tend to be quite continuous. Trying to put together a target size is very difficult. If the 8km strike length at Purdy's Reward is continuous as the metal detector fossickers' track suggest and if the conglomerate is at least 5m thick (most up are up to 20m) and if it continues for at least 1000m down dip (as indicated by the cross section above) then a large volume of 40million m3 is generated. If the grades are 10g/m3 (say 5g/t @ a Specific Gravity of 2.0) then 13moz would be a reasonable target. Increase any of the components other than strike then we could have any of these:- 300moz is only about 10,000 tonnes. And consider that the CRA hole was 65km away at 1756m depth. Witwatersrand is 150,000 tonnes. But clearly, proof of continuity will be critical. Small resources stocks just might have a very strong run. And the Gold Index just might double within the next 10 months. Don't forget Mustang, ASX.MUS, now with over 350,000 carats of rubies to auction this month.  At what received price? At US$60/ct this is US$21m (A$27m)gross revenue but with US$100/ct it is US$35m(A$45m). Costs should be well under US$10m. MUS currently has about 65% equity. Not bad for 9 months work against a market cap of A$85m! Of course as was noted in Dawes Points #69 local investors are very well cashed up. Class Super SMSF asset Allocation Showing Low Equities and High Cash The bigger brothers in the Future Fund have had a good steady record of appropriate returns but with just A$8bn in Australian Equities (6.0% of funds) and A$28bn in cash (21%) they will be missing out on the Resources Boom. But, they are not alone.  Look at the cash in China. And Singapore. It should be a very interesting few years. I hope you are on board. Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #70 10 October 2017

Global Boom Well Underway #69

by Barry Dawes

Key Points

  • The Fear Thesis has failed!
  • Global GDP growth all on track for accelerating expansion
  • Commodities are signalling boom times have arrived
  • The Dawes Points Global Economic Boom is well underway
  • Expect 15 years of prosperity
  • Gold now above US$1300 and 6 year downtrend broken
  • Copper exceeding US$3/lb
  • Iron ore on its way to US$100/t again
  • Zinc, Aluminium, Lead and Tin strong
  • A$/US$ testing 100 year down trend
  • Resources sector earnings powering along
  • Equity markets continuing surge
  • Seaborne freight rates moving higher
  • Australian investors massively underweight resources
  • ASX.BHP, ASX.RIO, ASX.FMG, ASX.S32, ASX.CL1
  • And hundreds of smaller resources stocks
'Heed the Markets, not the commentators' has been the defining theme of Dawes Points these past few years and this approach has held up very well.  The Fear Trade Thesis has failed. The Global Economic Boom rolls on!  And it will last a long time! How often have key investment banks, journalists, newsletter writers and `gurus' given you the Fear Trade Thesis and told you China would fall over, Europe would crash and the US enter its Greater Depression.  Debt would overwhelm everything.  That oil would be US$20/bbl, iron ore sub US$30/t commodities would fall and gold was not required because there was no inflation?  That the world needed income at any cost and that fixed income such as bonds was the only answer. Often. North Korea is the latest Fear but Australian shares holders have been more nervous than those in Sth Korea, China and Japan.  This particular Fear has been around for a year or two but look at the past four quarters for stock indices in Asia and in the month of August 2017. China and Hong Kong powered away in August and in the last week the All Ords was down 0.4% with Japan up 1.23% and Sth Korea down just 0.88%.  Some Fear Trade! But look at the past 11 months.  Australia how pathetic. Quarterly Performances of East Asian Stockmarkets Well, whilst the North Korea Fear has really yet to run its course, NONE of the other gloom has really  happened. So the question for all the Bears is why hasn't the Fear Trade worked?  What do you have to say for yourself? In contrast to the Fear, economic GDP growth figures have remained robust, equity markets around the world have gone to all time highs, prices have risen for many commodities and property remains in a global bull market.  What is to Fear? OECD's GDP Data and Forecasts More recent data have been stronger in the US with estimates revised upwards and also for Japan which is showing life again after almost two decades in the doldrums. Growth is accelerating! The US$ which was supposed be strong with rising interest rates just isn't. Market data, earnings data and prices of equities and commodities have continually exceeded general 'consensus' forecasts and those reading these actions would not be happy. For the Bears who have been fortelling gloom for all of the past eight years since the lows in general equities in March Qtr 2009, what will their story be?   An epiphany or is it a generational change coming. The only real answer to why the Fear Trade hasn't worked is that people make the markets. Not economists, Presidents, central banks, politicians, public sector bureaucrats, journalists nor 'the media'. People. And people make the decisions. People outside the professions, bureaucracies and corporate operators. People and their dreams and fears. There are just times when people feel enough fear and bearishness to continue to withdraw from all markets and commerce and to just sit pat and build up a large wad up of cash.  Stay calm.  Reduce risk. But new clothing, birthday dinners, a new car and just general stuff need to be bought. The coming of age party, the wedding, upgrading a house or new child just have to be paid for.  Personal technologies always become `must have' items. The list goes on. And life goes on, steadily.  Wonderful. However.  1400m people in China have next to no consumer debt and just want to raise their living standards.  Another 1300m in India.  600m in ASEAN.  1000m in Africa. Lives of these people are tearing along at a great pace albeit from a lower base.  Around 1000m will be entering the `Middle Classes' by 2025 we are told. Those living standards will require much more steel, copper, aluminium, zinc.  And oil and gas and other energy sources. And food, especially protein. The dreams of these people in Asia and Africa are far different to the fears in the West but rises in equities and commodities and falls in Western defensive bond portfolios are changing these Western fears to dreams again. And the dreams just might get a solid boost very soon in the Dawes Points World. It is when the sirens are loudest on gloom that the best buys are made. Heed the markets. The biggest markets are the most important markets.  And the biggest market, the bond markets, has had all the hallmarks of bloated, irresponsible (read government deficits) and speculative (`free money' for amoral politicians to buy votes) activity that marks a market high.  Professional and Retail Money to the tune of around US$100trillion was sucked in.  There probably has never been such a concentration of global capital in one sector ever in economic history. A crowded trade.  A one way market. How will it end?   Slowly declining at first because massive pension funds continually need long term confident yields to match long term liabilities.  Pension inflow keeps rising but when safety refuge is no longer required then bond risk rises and pushes up yields and then coupons. In contrast, global equity markets have surged higher with the US amongst the leaders but it is not necessarily the key driver. But with the US, there is a definite change in mood. Consumer confidence is at a ten year high but note that this Index was already moving higher and has accelerated under Trump's Administration. US Consumer Confidence Index Heed the Markets! Now look at this graphic of the Dow Jones 30 Industrials. Pushing on the trend channel overhead resistance line. I can't recall ever seeing a market do this. Usually markets hug the bottom channel trend line as support. This market is continually pushing against resistance!   This is suggesting strength.  And probably great strength. No Bear here???!!!! I am still seeing so much commentary about stock market crashes to be caused by something but I also keep seeing data about investors seeking the safety of bonds. This graphic doesn't suggest a market rolling over after spiking into a major high but rather one about to move up strongly. In the longer term focus, should stocks break higher from here then the move could be quite sharp and rapid.  If this view is correct then there could be 3,-4,000 Dow points added by year end. Long Term Dow Jones Trend Channels – Coming acceleration?? Keep in mind it is always `Sell in May and go away. Come back on Labor Day. (1st weekend in September)'. September might just get a few underweight investors excited when they return from holiday tomorrow. Here in Australia the All Ords has been woeful.  Truly underperforming. All Ords Long Term Trend Channel  -  Big upside coming But there is hope.  The short term picture is suggesting a sharp break higher through 5800 and to targets above 7000.  This should come very soon. All Ords Short Term Trend Channel  -  Big move coming very soon Dawes Points considers that it will be the Resources Sector through copper, gold and iron ore that pushes this index sharply higher. Dawes Points has also highlighted just how long this correction has taken after the preceding 10-12 year bull market.  Strongly indicates that this new bull market leg will now last for years.  Fear takes a long time to flush out but as early entrants make very high returns and book profits so will new entrants keep coming in a virtuous circle that will last many years. It is happening right now. The Australian Resources Sector relies primarily on the global steel industry with the three major stocks ASX.BHP, ASX.RIO and ASX.FMG being critical drivers. This focus on the steel industry in China has been so important as it is a true real time indicator of economic activity in the world's largest economy for raw material consumption.  China produces almost 900mtpa of crude steel and consumes about 800mtpa.  The US produces 84mtpa and consumes 120mtpa. China consumes over 50% of the world's steel and over half of most other metals.  What happens there determines what happens in resources commodities and steel is an excellent indicator. India, is also emerging as a major force in the demand for commodities. Crude steel output in India exceeded 100mtpa in early 2017 and is on track to soon pass Japan as the world's second largest steel producer. China and India with 1,400m and 1,300m people respectively have rising middle classes that have rising personal disposable incomes that produce rising living standards that require more consumer goods and governments there are to provide improving infrastructure to cater for more housing, services for health, education and welfare and transportation. Again, this is most easily seen in steel production and consumption. It is also seen in demand for gold. China and India almost ARE the gold market. So the mine supply vs Chindian demand results in a major transfer of gold from the mines in the West (and from bank vaults) to the people of Asia. Copper is moving up strongly as it should with no inventory, improving economic activity and insufficient new supplies.  This bull market should run for many years so you can pick your own price target for your time frame.  US$6/lb within four years is my call. Why do we say this? It is not just a `chart target'.  Disjointed supply and demand in commodities produces some very low prices and some very high prices.   Short covering doesn't just occur at lows.  It also occurs at highs! VERY IMPORTANTLY note that the rally in copper into 2011 exceeded the 2008 high.  This indicates very great internal market strength. Or in other words, much higher demand than is currently forecast, no inventory and insufficient near term mine supply. Long Term Copper Channels – Now in next channel with resistance around US$3.50 This US$ Gold break upward is of MAJOR significance. The six year downtrend from 2011's US$1923 high is now broken. And Gold's 2011 rally above 2008 shows even more internal market strength. The 11 year bull market followed by a six year correction should lead to a 15 year or more bull market to come! Or in other words, transfer of gold from West to East, Asian jewellery demand exceeding mine production, severely depleted gold inventory in the West and some serious short covering to come. Long Term US$ Gold Chart  - Six Year Downtrend broken  - Price Targets are High!! Iron ore is still considered by Dawes Points to be in a major bull market and, as we saw with copper and gold, new highs were made in 2011. Dawes Points very successfully called the US$ iron ore price in 2016 and US$95 into 2017 and the US$100 by mid 2018 target still holds. Current focus on the high grade >62%Fe haematites is showing the strong markets with premiums for grade but substantial discounts for lower grade material.  This market action is indicating that global reserves and resources of high grade iron ore are being depleted.  Blast furnaces operate on volume of the furnace so higher grade iron ores put more Fe units (1 unit = 1% = 10kg/tonne) for the same volume.    Strong demand for steel in China is keeping blast furnaces at high operating rates so high grade is better.  Also higher Fe grade means better operating efficiency, less coke and fuel and marginally less furnace slag to dispose of so reduced emissions and environmental benefits are noted. RIO's new Silvergrass  mine is higher grade ore to meet current demand. Most of the 140mt of China port stocks is lower grade from marginal mines  (and not from FMG) so it does not really affect overall iron ore prices just now but there is always the price/grade trade off and the market should move back to reduce discounting over the next year. Iron Ore CIF Tianjin 62% Fe The preference for high grade Fe content brings us back to the need for our favourite magnetite concentrates as furnace feed.  Fe3O4 is just better all round than Fe2O3. Magnetite with 69-72% Fe delivered as a concentrate product not an ore. Consistent grade, fewer and lower impurities and worth US$20-40/t more than current 62% hematite. Lot's to like. House stock ASX.MGT along with ASX.IRD, ASX.HAV and ASX.CAP have some lower capital and opcost magnetite projects in Sth Australia. Watch them. The monthly check on crude steel shows boom times still with close to 900mtpa in China.  India, RoK and Japan did well also. Crude Steel Production in China Close to 900mtpa - US Hit 7mt in a single month – first in 2 years So it will be the Resources Sector Leaders that will push up the Australian market. And note this:- A recent survey by ASX-listed Class Super (ASX.CL1) on its 140,000 Self Managed Super Funds (~24% of all Australian SMSFs) showed only 29% of total capital was invested in listed equities and 22% of total capital was in cash and term deposits. Only BHP and Woodside as Resources Stocks were represented as having  more than 1% of all capital. And less than half the accounts held them. An article on this asset allocation referred to the Future Fund and Family Offices had similar defensive portfolios.  Bizarre. Class Super SMSF asset Allocation Showing Low Equities and High Cash The world is underweight Resources Stocks through the Fear Thesis So look at these Resources stocks that will drive the All Ords. BHP   Copper, Iron Ore, Coking Coal and Petroleum BHP to Reach New US$ Highs by end 2018 BHP is much leaner and the balance sheet is better.  Dividends will be flowing through. RIO  Copper Iron Ore Aluminium RIO Has Broken Out with New US$ Highs Likely RIO is in the best shape of the past 20 years. FMG  Iron Ore Just a brilliant company!  Output 170mtpa and costs under US$12/t.  Balance sheet improving and dividends really flowing. We should add BHP spinoff ASX.S32 to this list.  A great company! Did you see the recent June half results for the iron or operations of BHP, RIO and FMG?  Some strong numbers.  Much more to come. Hard to imagine they will be lower in the Dec Half of 2017.  A stronger A$ might crimp June 2018 but with >US$100/t maybe not. The improving resources market is showing up in rising global sea freight rates. A major increase in the supply of shipping caused a major decline in freight rates and distorted the significance of this Index.  However, over the past few years, balance has returned and it is now closer to its previous indicator status. And it is saying global trade is improving. Baltic Sea Freight Index on the rise again And bringing this all together is the A$/US$ rate. The A$ was strong into 2011 (note this was another market that was strong in 2011 so will be very strong in this next leg) and broke the 1913 downtrend. This is over 100 years of history. After the pullback into 2014 the A$ is rising and will again break this 100  year downtrend once US$0.81 is broken. 103 Year Long Term Graphic of US$/A$    A Major Turn Here. Heeding the markets not the commentators has paid off handsomely. Investors have numerous opportunities to increase your wealth significantly over the next few year. Seize the opportunity! Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #69 5 September 2017

Diggers and Dealers 2017 Report #68

by Barry Dawes

Key Points

  • Gold rally starting on cue
  • Expect ~100% upside in ASX.XGD over next 12 months
  • Australian Gold Industry excelling again
  • Gold production surging
  • Cashflows increasing
  • Dividends rising
  • Exploration success everywhere
  • Mines going deeper
  • Seasonal performance of XGD highlighted
Preferred stocksPremier Golds ASX.NST, ASX.EVN, ASX.TBR, ASX.RND, ASX.SAR, ASX.DCN, ASX.WGX, ASX.RRL, ASX.SBM, ASX.RSG, ASX.GOR. Secondary Golds ASX.BLK, ASX.KIN, ASX.PNR, ASX.AUC, ASX.EGA, ASX.TNR. Other resources ASX.MLX, ASX.MUS, ASX.FND, ASX.AMN, ASX.SFX, ASX.HRR.   Australian mining Industry, please take another bow!  What a performance there at Kalgoorlie this year. For the Gold Sector, another year of production and resource growth and some outstanding brownfields `discoveries' in WA's goldfields. And a year of some big operating cashflows rolling through that is boosting exploration, operating capex and paying some big cash dividends. Other sectors like iron ore and copper are also doing well. Diggers and Dealers is skilfully timed to catch the end of the Northern Hemisphere summer and the seasonal run in the gold price and the ASX Gold Index. Ridiculous as it may sound, the world gold price usually manages to kick up on the Friday before Diggers to get the faithful aroused but gold decided to wait until the middle of the Gala Dinner after the conference closed on Wednesday to put on US$15 and set the XGD firing.  More gains (almost US$30) to test US$1300 came over the next couple of days. As an unabashed bull of most things and almost everything gold Dawes Points considers the timing is pretty much on schedule.  Gold has shown clear seasonal strength after the Northern Hemisphere Summer and into the following February. Source: Seasonax And gold is just about ready to move much higher.   It may take a couple of weeks to back and fill and to whipsaw aggressive traders but a move through US$1,300 with appropriate retesting and consolidating should send it much higher later in 2017. If Nth Korea is the issue, the buying pressure could get quite serious although the issue will probably be more bluster than bother.    Recall that the Sth Korean KOSPI Index has risen 20% in 2017 and seems to have been anticipating re unification and an end to that abominable repressive regime in the north. But do not lose track of the bigger picture. Rising living standards in Asia are driving demand for gold and the gold price.  Gold has moved from the West to Asia and a short squeeze is likely to develop. Should gold break upward here to above US$1300 and begin moving higher then the 2011-2017 downtrend will have been broken! Note that the move from US$246 to US$1,032 over 8 years was US$786 and to US$1,923 over 11 years was US$1,677. These are just numbers but it always astounding how they will recur. We have two important points to consider here from my perspective.
    1. If the US$1,032 is the intermediate high then there is US$600-700 to come quite quickly to take us to US$1,900-2,000. The run to from US$1,032 to US$1,923 with that US$891 gain is cream on the cake and could come again later as the next leg to almost US$3,000. This move would really show me the power of this bull market that is brewing in gold.
 
  1. However, if the US$1,923 is the intermediate high then, perversely, gold might `only' get to US$1,923 then have considerable consolidation over a longer period and this market would not be quite as powerful.
Let's just see.  And don't be too dismissive.   A strong 11 year bull market rising US$1677 is to be respected.

A$ Gold price.

The recent strength in the A$ has been as expected and the A$ gold price has just clung on to its uptrend.  It has bounced nicely now and it on its way to the top of the uptrend channel.  The first target is up around A$2,000/oz.   The next channel projects much higher prices. So let's come back to the XGD and the seasonal influences. The 2000-2011 bull market in XGD (note this was at least eleven years) rose 750%. The very first upleg into 2002 of the 2000-2011 stage of the bull market had a 130% gain before its initial 27% ten month correction ahead of the longer term gains which included 72% over the next nine months. The very first upleg in the current next stage of the bull market was up almost 230% in 22 months before its ten month correction (which has now finished after a similar 27% decline). The XGD should be looking to at least test of the 8499 April 2011 high within the next 12 months. Big call, but higher gold and a still very share price depressed but highly operationally and financially successful Australian gold industry could do it easily. Note that the ASX.XGD has 27 companies which are almost ALL Australian based companies, not the 52 often foreign and often not gold producers in the XGD in 2011!! Let's hope S&P doesn't repeat the previous idiocy with choice of stocks in the XGD. NST has pointed out that there are only 20 mines producing 300kozpa or more in Tier 1 jurisdictions (Australia (8), USA(8) and Canada (4)) (+3 in Ghana) around the world and its Kalgoorlie and Jundee mines would soon add two more to these 20. These ten Australian large mines should give Australia an extra quality boost and eventually an international premium. Seasonally the XGD has kicked off after Diggers since the XGD was initiated in 2000.  Taking all 17 years we get an average gain of 8%.  Taking out the misery years of 2008, 2013 and 2014 gives a 14 year 'adjusted' average gain of 23%. FY18 with all the current action couldn't possibly be an average year so expect at least 23% in the December Half 2017 and more before June 2018.

Diggers and Dealers 2017

Another brilliant event after a brilliant year. 48 presentations and over 100 booths so a lot to see. Starting with the Mining Company Awards let's look at these:

Best deal

Gold Road (ASX.GOR and component of Dawes Points 1 Dec 2014, 1 Jan 2016 and 1 July 2017 Portfolios)   - Sold 50% of Gruyere 6moz discovery to new JV partner Goldfields for A$350m and is reinvesting into more Yamarna Belt exploration St Barbara (ASX.SBM and component of Dawes Points 1 July 2017 portfolio + independent acquisition at A$0.21 in Feb 2015)  - brilliant recovery to A$3.77 through Gwalia mine producing 265koz @ 10.7g/t and repaying A$347m debt) Kin Mining (ASX.KIN and component of Dawes Points 1 July 2017 portfolio) Acquisition and rediscovery of Mertondale  (12km strike on Shear) and Cardinia Belts(~4km strike) with open down dip potential. Fully deserved. Other stars gave Kalgoorlie its renewed life and Australia is now entering a truly Golden Age as its (mostly) WA gold miners re examine old gold fields and push exploration and mining down to depths the rest of the mining world has considered normal for decades.  Don't think 600m. Think more 1500m and as St Barbara is showing at the Gwalia Mine, 2600m and more.  And think higher grades. Try 10-15g/t. Technology is assisting here with 2D and 3D seismic being adopted. The WA industry is now pushing on strongly after the production decline that essentially left it out of the 2000-2011 bull market in gold. This graphic may just be too conservative as well. Kalgoorlie has again become the regional centre of attention.                         Kalgoorlie Geological Terranes To the west of Kalgoorlie, the Coolgardie Domain system incorporating the Zuleika and Kunannalling Shears is prime gold production real estate.  This domain extends from Kalgoorlie over 150km to Ora Banda. This is giving us today's The World's Most Exciting Goldfield with Northern Star and Evolution utilising highly skilled teams to crack the codes to new and extended high grade deposits that have given us Tier 1 mines with >10 years life. Both these stocks will be rerated as mine lives are bureaucratically confirmed. EKJV partners with NST, Tribune (ASX.TBR) and Rand (ASX.RND) should also more than double in the next year. The evidence was there in front of us more than a year ago but some people are just a bit slow on the uptake.  Note too little ASX.TNR that has a very large footprint in this region. This is now the fourth largest goldfield for Australia with production of about 420,000ozpa and growing. Table   Major Australian Gold Mines  (current output kozpa)
Boddington 800
Big Pit 700
Cadia 620
Zuleika 420
Tanami 400
Telfer 366
This is a group effort and all players are likely to add to growing gold output over the next five years. And the resource growth has also been spectacular for NST, TBR and RND as concentrated and committed exploration programmes have been running hard although EVN's Phoenix acquisition is being reappraised after being severely reduced in 2016. Overall resources should be much higher for annual reviews by mid 2018. NST spent ~A$18m on Zuleika exploration and has added a net 35% to resources to the East Kundana Joint Venture (EKJV) below. Source: NST And increased its 100% owned Kundana/Zuleika operations to 1.8moz with much more to come. Source: NST NST's 100% operations will be rising to 175kozpa to give an overall net 300kozpa to NST during 2018. Evolution is also now in full swing with 9 months of Zuleika exploration and its equally talented discovery team, whilst a few years behind NST, is finding extensions to its White Foil mine and also may have found down dip indications at Frog's Leg and recent Innis target drilling has picked up the structure trending to the south east.  Zuleika Shear will take 50% of EVN's FY18 exploration budget. Source: Evolution The Phoenix acquisition is being reappraised after early disappointment but the results are now coming through. Keep watching for results from exploration further to the north at Blue Funnel, Emu and Burgundy. All the way up to Agnes at Ora Banda, to the north of the Zuleika Shear. Blue Funnel has 7km of Zuleika Shear tenements and will be a major exploration focus for EVN. Emu is providing some Zuleika Shear style grades and intersections along the Kunannalling Shear to show that much more is come from this World's Most Exciting Goldfield. Source: Evolution This is just part of a major reassessment of the exploration potential of the Kalgoorlie region. In just Evolution's Coolgardie Domain drilling the historic records show a very modest % of drilling has exceeded 200m vertical depth. Source: Evolution Repeat this over the Yilgarn with an industry generating cash and many new players raising new equity. And then all of WA and then the rest of Australia. Source: Evolution To the North and East of Kalgoorlie we have many more very interesting goldfields:- St Barbara Mines ASX.SBM - 265kozpa from Gwalia at Leonora – SBM expects to be mining this to depths beyond 2600mbs Saracen  ASX.SAR - 300kozpa from operations near Laverton (Carosue Dam) and Leinster (Thunderbox) Carosue Dam is 160-170kozpa.  Open at depth. Thunderbox is 130-140kozpa and also open at depth. ASX.NST's 300kozpa Jundee Mine The brilliant NST has repeated Zuleika at Jundee with a truly outstanding effort. Resources have grown from 500koz on acquisition in July 2014 by 590% to 3.0moz with reserves up 350% to 1.4moz whilst output has exceeded 233kozpa with a 335kozpa rate achieved in June Qtr 2017.  Note that gold output over 2008-2010 exceeded 350kozpa (410koz in 2009) on much lower resources and reserves. Source: NST NST expects it will exceed 300kozpa here within 24 months through new mining faces and a plant expansion to 1.7mtpa. A properly funded exploration programme at Jundee might have a major impact here.  Note that the upper zone in the green box down to 700m might just be repeated in the next 700m. Source: NST The Armada Trend is already showing continuation of mineralisation into the lower zone and the deeper Zodiac discovery of 4.8m @ 21.2g/t is very exciting. Source: NST Could NST find another 10moz in the next 700m?  Probably. In another year it might be that Jundee becomes The World's Most Exciting Goldfield. WestGold ASX.WGX  Combining 5 goldfields and 5 mills for >400kozpa Gold Road ASX.GOR  Yamarna Belt Exploration continuing after selling a 50% JV interest in the 6.2moz Gruyere deposit for A$350m to Gold fields Ltd. Dacian Gold ASX.DCN  Completing construction of 2.5mtpa plant for >200kozpa Regis  ASX.RRL  Duketon operations giving 350kozpa Blackham ASX.BLK  Wiluna is still very attractive and BLK is very cheap Pantoro  ASX.PNR   Expanding to 100kozpa Kin Mining  ASX.KIN Mertondale and Cardinia Projects near Leonora

Special mentions

Resolute  ASX.RSG  With >300kozpa RSG is due a serious rerating again. Metals X   ASX.MLX   Base Metals with excellent tin, copper and nickel operations Agrimin  ASX.AMN  Lake Mackay Sulphate of Potash (SOP) Project   Excellent presentation BHP Nickel West ASX.BHP Nickel sulphates for Nickel-Cobalt-Lithium-Graphite Batteries.  Interesting approach to managing your product for a changing market Kirkland Lake TSX   Gold intersection of 15m @1421g/t for the >200ozpa Fosterville operating mine in Victoria West African Resources   ASX.WAF  Sanbrado Gold Project Burkina Faso with high grade core zone of 245koz @ 34g/t. Sheffield Resources ASX.SFX Minsands development project in WA Mustang Resources ASX.MUS   Ruby producer in Mozambique Egan Street Resources  ASX.EGA Redeveloping the Rothsay Gold Project Finders Resources ASX.FND  SX-EW Copper mine in Indonesia on PER <2x from 25ktpa copper metal Heron Resources ASX.HRR  Has Woodlawn Cu-Zn-Pb-Au-Ag resurrection financed (A$240m) and ready for production in FY19. The Diggers and Dealers Forum does showcase Australia's robust mining industry and the location in Kalgoorlie at the centre of gold mining never fails to impress with the entrepreneurial skills of the WA mining industry. I own NST TBR TNR EVN MUS BLK PNR AUC GOR HRR or control in portfolios. Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #68 14 August 2017

Global Equity Markets Take Off #67

by Barry Dawes

Key Points

  • Global equity markets breaking out in global economic boom!
  • US a leader but Germany and India also in vanguard
  • SE Asian markets finally breaking higher
  • Global bond market is US$100tn in long and wrong positions
  • Massive bond sell off to provide ample funds for equities and commodities
  • Economic activity to accelerate everywhere
  • A$ to remain firm
  • Resources stocks are still unloved and underowned
  • Major rerating expected
Preferred stocks  ASX.BHP, ASX.RIO  ASX.FMG Observing world events at this extraordinary time is a truly inspiring experience.  The Trump emergence and the reaction of denial and hysteria from so many sectors is fascinating.  The changes taking place are of epic proportions and the world appears to be at a major watershed moment.  It seems the world is moving from a certain period of fantasy back to reality Watching global equity markets and also the bond markets is actually quite exhilarating because these developments are truly once in a life time events.  I have said it before but these are times you will be able to tell your grandchildren that you were there. Equity markets are breaking higher in a massive bull market. Bonds have peaked and are on the way to eventual collapses and probable oblivion for many issues and issuers. Dawes Points has been resolute in maintaining the same consistent story for some time and, apart from the undeserved weakness in my own resources sector itself, everything in the outlook of the past few years has just about come to pass. The US didn’t slip into the Greater Depression, the US equity market didn’t collapse, China didn’t implode, the European banking system didn’t collapse and the Great Australian Recession of 2014/15/16/17… hasn’t happened. The A$ didn’t dive to sub US$0.50.  The iron ore price is not US$20/t.  Oil isn’t at US$20/bbl. In contrast, global equities are making new highs, global economic activity has improved and resources consumption has continued to grow. So let’s review it all for the fabulous bull market unfolding for most things and resources in particular. The equity markets outside Australia are now booming on as noted but first let’s look at the global bond markets. The bond markets are currently far larger than the equity markets.  This is mostly due to government budget deficits in so many nations where social spending is growing along with ageing populations and also an ever-growing range of services that politicians bribe with and voters demand of government. The artificially low interest rates have allowed these expenditures to continue but now this game is over. Interest costs now make up a significant proportion of budget expenditures and as the coupon interest rates demanded for bonds keep rising, that proportion can only increase. Many governments may be issuing sub 2% coupons on 10 year bonds today but in another year or so the rate may be 4% and the interest cost share of budgets might just double given that most bonds issued to date have not been 10 years but are in fact very short dated. Globally, the US 10 Year Treasury Note is a critical component in the outlook for all bond markets. It is probably the largest individual component of the global bond market and it sets the global `risk-free’ rate. You need to be able to imagine that the `price’ of a 10 year bond is a moving feast and so a `price index’ must be made up of a collection of a wide variety of bonds with exactly 10 years to maturity.  This can be 30 year bonds issued 20 years ago, 20 year bonds issued 10 years ago and current new 10 year bonds.  The interest rate from the time of issue (`the coupon’) could be 12, 10, 8 or the current 2.4%. The bond price index is thus a true cocktail. This index, however, peaked back in 2012 and has been telling us all something of what is to come. Sharp initial falls, partial recovery then more sharp falls.  More falls to come. To understand all this you should be aware of how bond pricing works and what might soon be happening in these markets. A simple assessment points out that rises in interest rates cause falls in the price of bonds and falls in interest rates cause bond prices to rise. Also increased buying of bonds can increase bond prices to drive down yields (interest rate coupon divided by bond price, e.g., simplistically, 5% pa paid as $2.50 half yearly  on a $100 bond so bond buyers bidding up the bond price to $105 will only get $5/$105 = 4.78%,). Selling down of bonds to $95 gives a higher yield of $5/$95 = 5.26%. The selling of a bond may reflect the holder’s wish for liquidity and not the overall interest rate environment. Here also the lower the coupon on the bond the higher the price volatility. And, the longer the duration of the bond the higher the price volatility. The world now has a lot of low coupon bonds. So expect high bond price volatility. Note the fall here in the 10 year bond from 133.21 in mid 2016 to 125.36 has given a capital value 5.3% lower and that bond now has only 9 years to run. If you bought that bond at the yield to maturity of 1.35% in July 2016 you have already lost in capital the equivalent of 4 years of 1.35%pa income. Remember last year when you were told the world was seeking income at any price. Sell your 2,3,4,…..5% yielding stocks and buy 1.35%pa 10 year bonds.  What a bargain! With the 30 Year T Bond the stakes become much higher. A year ago these bonds peaked at 176.06 when yields were just 2.1%. Buyers then are now 29.6 points or  16.8%  less wealthy and have lost 8 years of 2.1%pa income in capital losses. Unlucky. The long term for bonds looks just awful.  Very unlucky if you own these instruments. A very long term Rising Wedge has been in play for some years. The deadly rising wedge has uptrends having lows in price rising faster than highs in price and at resolution usually falls sharply. The US 30 Year T Bond has a 35 year rising wedge life history.  Note the sharpness of the fall from that July 2016 high of 176.06 to 146.46 in March 2017. Nine months and 29.6 points is 16.8%.    The next fall would be to 140 and then to a target of about 120  - equal to about ~20% capital losses in `risk-free’ investments. Very unlucky. Now this is the bond market for the US of A.  It is not Italy.  Or Spain.   Or Greece. Have a look at these numbers on the US Budget.  The numbers from www.USFEDERALBUDGET.com are actuals and best guess forward estimates.  These may be different to other numbers currently circulated but they are a fair indication of the trends. Some important things to note. The deficits are well down on the peak years of >US$1000 over 2009-2012 but even with a recovering economy the deficits are growing again as the interest rate cost rises. Interest expenses could rise from 6.5% of all other expenditures (6.1% of total Budget expenditures) in FY2016 to 12% by FY2020. And look at the projected average interest rate of 1.90% for FY2020 and compare it to FY2017 at 1.49%. Now look at this Projected Maturity Profile from the US Treasury (late 2015 I know but I could not find a more recent version. Why?)  which shows <12% was longer than ten years and >65%  shorter than five years. Source: US Department of the Treasury August 2015 You could feel despondent about all this but rather than think about bond markets setting the interest rate level you should see this ~US$100tn globally as a wonderful source of capital. The capital that has for years been denied to you to develop your project. Keep in mind that the world should get by with 5% Ten year bonds as it has for most of its history. The market place and equities and commodities will withstand these falls in bond prices as the capital flows out of this overbought, over-owned and wretched asset class. It is already. The US Housing Sector thinks it is wonderful!  Bricks and mortar before paper assets. Housing starts seem to be having a normal summer seasonal breather and should turn up for the Dec Qtr. Banks just love higher interest rates because they give improved lending margins.  And a rising Fed Funds rate forces banks to lend more of their outrageous QE money to the general market place at last at much higher margins. And hope you noticed that banks last year ended 14 years of underperformance against the S&P500 and are amongst the market leaders now.  Clearly higher bond yields aren’t important here either.  So coming back to other 10 year bond rates look at this graphic with the US 10 year, US 30 Year ($TYX), UK 10 Year, German 10 Year and Japan 10 year included.  The `negative interest rate’ hysteria was the top of this bubble! Just as the US ten year bond has broken a nine year downtrend so have German and Japanese bonds. The UK is just at its downtrend and about to break through as well. So back to equity markets and what about them? The markets are speaking.  While the bonds are selling off, equities are rising. The Dow Jones 30 is making new highs and is accompanied by the Dow Utilities and Transports. Nasdaq is making new highs. And small caps indices like the Russell 2000 keeping making new highs.  Remember when you were told to sell small caps and stay only with the large stocks because the end of the world was coming?  More recently it was `FANG stocks were the only things pushing indices higher so watch out’! So the US recovery is real and it is helping everywhere else and Germany is also leading the world to new highs. India is next and what a leader this is.  Loads of upside. So much for Brexit bringing down the UK. This Morgan Stanley Portfolio represents a composite of emerging markets and would include most Asian markets.  The performances of Singapore, Thailand, Taiwan, South Korea, Philippines are similar to this proxy. However, the most important markets are Japan, Hong Kong and Shanghai. Japan is heading for new highs in this post-2009 rally. Hong Kong is now ready to move substantially higher after a decade of consolidation. Shanghai is parallelling the other markets and is now ready to approach and break through 3300. In Europe as noted, Germany is leading with the UK next but France, Spain and Italy are also moving up constructively. Closer to home, the New Zealand market has been one of the best performing indices. What an outstanding run! Which brings us back to Australia.  The perennial underperformer. But it could now be ready to play catch up. Look at the ASX:XMM Metals and Mining Index. The 2011 downtrend is broken and the index is getting ready to fly. BHP, RIO, FMG and other resources majors are ready to run at last.  (Note these are US$ prices in US market.) Dawes Points has been an unrepentant A$ bull and should we break above about US$0.79 then a bigger rally should ensue. And note also that the 104 year downtrend from 1913 comes into play at just over US$0.80. So, what does all this mean? Well, a major global economic boom is underway.  It has taken much longer to develop than has been expected here but in turn it should now last much longer than you could imagine.  Resources commodities from iron ore, coking coal, copper, aluminium, zinc, lead, tin, cobalt, gold, silver, palladium, platinum, minerals sands and much more will have higher prices.  All will reflect record consumption demand, low inventories, insufficient new resource developments and not enough exploration. Are you on board? Make sure you have your portfolio together because big gains are coming. Contact me to participate. Barry Dawes BSc F AusIMM (CP) MSAFA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #67 18 July 2017

Raisemetrex: A New Capital Raising Platform – Supported by MPS

by Alison Sammes

Key Points

  • New fintech platform allows universal access to capital raisings
  • Novel extended prospectus allows immediate access to new shares
  • Platform may allow streamlined access to future MPS capital raisings
  • Platform useful for Corporate Issuers as well as investors
  • The first opportunity is with Catalyst Metals Limited (ASX:CYL) raising at A$0.50
LINK TO RAISEMETREX REGISTRATION AND ALSO CATALYST PLACEMENT
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
Martin Place Securities is pleased to introduce you to a new fintech web based capital raising platform that can streamline some investment processes for you. The platform will host IPOs and placement opportunities in companies seeking new funding capital and Martin Place Securities will be the first broker to participate in this innovative system. The Raisemetrex platform is a very simple system. It will register you as a user and then allow you to apply for shares in capital raisings, retain all your registration details, provide a BPAY message to carry out the funds transfer and complete the process to the share registry. This will allow you to choose your investment size, complete registration details and send your payment from your desk or your smart phone within minutes. The registration will allow each user to have the details of multiple entities ranging from your own name to your super fund or investment company. The platform will securely provide all the details online to the share registry, allow you to add your HIN or SRN to the specific application form, and deliver the funds to the company's bank account via the BPAY system. The platform will also provide share application form records and a history of all your participation in capital raisings carried out through it so that maintenance of your tax records will be easier. This is a new platform that uses a current company prospectus for capital raisings (IPOs, placements and rights issue shortfalls) and MPS intends to eventually utilise it for most future capital raisings once certain Section 708D issues are incorporated in the platform. MPS encourages you to register with Raisemetrex now and you will see that the first opportunity is with a prospectus issue for Catalyst Metals Ltd (ASX:CYL) at A$0.50. CYL is one of the preferred gold exploration opportunities in the MPS gold sector and I would encourage you to invest if it fits your investment profile. CYL has a large tenement area immediately to the north of the world-famous Bendigo gold mine, which produced 22m oz @ 15g/t, and during the period 1850-1890 was the world’s largest goldfield. The Company has several projects along the important Whitelaw Fault and is in Joint Venture with Gina Reinhart’s Hancock Prospecting Pty Ltd, which is funding CYL to earn 50% in the Four Eagles project. The geology is very similar to Bendigo but is totally covered by younger sediments in open farm land. Drill results released on 11 July 2017 included 27m @ 22.3g/t, 22m @ 31.1g/t, and 7m @ 26.1g/t. Numerous other higher drilling intersections have been recorded and the tenements are likely to provide an open cuttable resource in the near future.  Such a resource could provide open cut ore which can be delivered to near-by existing processing plants. St Barbara Limited (ASX:SBM) recently took a 5% investment in CYL at A$0.50. These links gives access to two announcements from 11 July 2017 – A corporate presentation on company activities and the assay results from recent drilling. A prospectus for the CYL issue is available online once you have registered with Raisemetrex. To participate and register with Raisemetrex, please click on the button below. LINK TO RAISEMETREX REGISTRATION AND ALSO TO CATALYST PLACEMENT For any query on Raisemetrex or Catalyst please contact me or Daniela Vecchio on +61 2 9222 9111 or bdawes@mpsecurities.com.au or dvecchio@mpsecurities.com.au. Barry Dawes Executive Chairman Martin Place Securities

Gold ready for improvement in Dec Half 2017 #66

by Barry Dawes

Key Points

  • Asian demand for gold still determining gold price
  • US$ gold testing 2011 downtrend
  • US Fed Funds Rate Hike is not negative for gold
  • Global bond markets weakening again
  • Block chain cryptocurrency boom is probably leading gold and commodities
  • ASX Gold stocks now very attractive
  • 1 July 2017 Gold Stock Portfolio prepared
  • MPS Senior gold stock universe PER 8.4x FY2018 EPS (excl NCM)
  • Emerging gold sector universe PER 2.5x FY2020 EPS

Preferred Stocks

ASX.EVN   ASX.NCM   ASX.NST   ASX.OGC   ASX.WGX   ASX.TBR   ASX.CDV    ASX.EGS    ASX.GOR    ASX.SBM    ASX.BDR    ASX.BLK    ASX.PRU   ASX.RSG   ASX.CYL   ASX.EGN   ASX.EXU    ASX.KIN   ASX.PNR   ASX.SWJ   ASX.TYX   ASX.WPG
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
The last three Dawes Points (#63-65) have reinforced a view that US$ gold prices are heading higher in the next major upleg in this powerful Bull Market. The pathway has been volatile, difficult and indeed, more recently, quite mean but the underlying longer term forces are strong and the bulls will prevail. The pressure now on the six year downtrend from the US$1923 high in Sept 2011 is really building after the last rally to US$1292 and recent history shows US$ gold prices have headed higher after Fed Funds Rate hikes.  The continually improving US economy will add to gold demand so be wary of the thought of higher interest rates would send gold lower.  Seasonal gold demand suggests a better outlook in the Dec half and gold futures short covering is taking place.  The projected short squeeze in gold cannot be far away now. Asian demand has been robust reflecting rising living standards in China, India and ASEAN whilst MENA and now Africa are also adding to demand. Changing fiscal terms in India together with better monsoon crops should now reignite gold imports after a short hiatus in this extremely important market. This Asian demand is absorbing Western gold inventory and all gold mine production and more. The strength of Asian equity markets has been notable for a few years now and even more so with the recent breakouts by some of the laggards.  This strength is a reflection of the underlying economies with China remaining robust, ASEAN continuing to power ahead and India now accelerating under the reforms being instituted by Prime Minister Modi.  Rising equity markets imply rising economic wealth and this is transformed into increasing demand for gold. This Morgan Stanley Institutional Emerging Markets Portfolio graphic is a good proxy for Asian markets and is just starting to break out upwards.  No bear market here! This expansion of the global bull market in equities is continuing everywhere and is confirming the unfolding Dawes Points Global Economic Boom that will pressure gold to the upside.  Easy money conditions, expanding global economic growth, rising property prices and the global bull market in equities are not conducive to sudden economic collapses.  Record consumption levels in resources commodities against rising capacity utilisation rates and NO inventory can only mean a one way long term price move for these raw materials.  And it won’t be down. Improving labour markets and low unemployment in the US are likely to bring about inflationary pressures after many years of dormancy so gold might soon become more attractive to Western investors again. Global bond markets are recognising these shifts in economic activity and are showing renewed weakness as capital moves out of defensive positions and into the equity markets which are making new highs. The important 10 year US T Note has already broken down from its 2012 high and has recently had another sharp fall. The 30 year Treasury Bond had an extreme overbought run into the `negative‘ interest rate scare in 2016 that surely ended 33 years of bull market and is now vulnerable to further falls. The three other important bond markets we follow - Japan, UK and Germany  - have also had sharp rises in yields which implies sharp falls in bond prices in the past few months.  Some long term (>10 years)  down trends have been broken.  That low interest rate party game is now OVER. The emergence of the block chain cryptocurrencies is fascinating and represents a move away from the disgraceful performances of the current political and bureaucratic classes and their engagement with debt and deficits in fiat currencies.  Enforced unnaturally low interest rates are a stealth tax and in several years time many bonds will probably be worthless.  The availability to governments worldwide of ultra low cost cash as debt won’t last much longer. Failure to attend to these endless deficits and rising sovereign debt can only end unhappily for bond holders throughout the world.  Was ever thus. The emergence of these crypto currencies in ecommerce and in transaction platforms, especially in emerging countries, is a new class of players signalling a requirement of `hard money’ beyond the control (for now) of expanding government controls.   The mania currently underway could well be considered a leading indicator for gold and commodities.  A view on these instruments will be presented soon because they are becoming a new asset class and they might be only just starting.  No advice here yet but we all ignore them at our own peril.   Concerns over further Fed Funds Rate hikes being bearish for gold simply do not bear true against the empirical evidence which clearly shows US$ gold prices have often actually headed higher. This graphic encapsulates the rates rises and gold price gains but also shows the testing of the 2011 downtrend and the `Good Bye Kiss’ on the 2013 downtrend.  A break upwards through US$1300 could well be very strong. This US$ Gold Price Seasonal Graphic highlights the weakness shown over the past 30 years into June ahead of stronger prices in the December Half.  The average is only around 4% so from US$1210 that is only about US$50 but the stakes are much higher in 2017 than most of the past 17 years of the bull market from 2000. Mid year weakness highlighted. Source: Dimitri Speck This longer term chart shows the significance of the 2011 downtrend.  Three times hit.  The fourth test often gives the break through. This graphic shows major support for gold in this US$200 trading channel of the past four years between US$1100 and US$1300.  These types of consolidation patterns often result in subsequent strong price moves. Whilst the action is in gold, and in silver and platinum these white metals are still probing for price bottoming, one precious metal is very firm and may be providing a future direction for all the precious metals. Palladium is primarily a from Russia supply story ( ~40% of mine production and up to 60% of supply) and a switch away from diesel engines (that use platinum for exhaust catalysts) to petrol (uses palladium). North American gold stocks are also suggesting the extreme volatility of the past 18 months may now be at last ready for resolution in the compressive wedging. An upward break out would be powerful from this pattern. Gold stocks against gold bullion have had a rough time for twenty years but a change is underway. The bullish case is even more encouraged by the very poor sentiment towards gold stocks that is apparent in Nth America. On ASX the turnover in XGD is seasonally softer but market share is holding around 4%. But valuations are still in the lower levels of the past 15 years. The lack of interest and the poor sentiment of the past few months are reminiscent of the June Half of 2003.  Low market interest in the June Qtr was shaken off by a very robust gain over 2003/04. Look at these numbers below and the remarkable periods of gain and loss. And the remarkable levels of gains and loss.  What a coincidence! ASX XGD performances over the two initial periods of each leg of the current bull market in gold. *Commencement of ASX Gold Index (Do note that the ASX XGD was only started in August 2000 so these numbers aren’t quite as meaningful although the Nth American XAU did make its bear market bottom about this same time in 2000.) Here is the graphic with the 2014-2017 rebased to 1000.  Remarkable similarities! So after 22 months of uptrend there was 10 mths of correction in each case. Where to next?  Much higher I expect. The performance of gold stocks over the past year has certainly been volatile so this table below is very helpful on relative performance and relative strength of a range of selected stocks. Pleasingly many of the MPS preferred stocks (CDV, NST, TBR, SBM in the seniors and SWJ, PNR, CYL in the smaller stocks) have been good performers but some of our others have been awful. Relative strength in soft markets is a good sign for a stock but some real bargains exist amongst the poorest performers as value is created. MPS has coverage of 69 gold stocks so far (there will be many more to come) to allow proper relative assessment of the sector and provide the best overall opportunities for investment. The MPS Universe of 20 senior ASX gold stocks (excluding Newcrest ASX.NCM) has the following attributes using the current A$ gold price of A$1596/oz:

FY16

FY 17

FY18

FY19

FY20

FY 17

FY18

FY19

FY20

Gold output (koz)

3845

4559

5225

5574

5855

+19

+15

+7

+5

Revenue (A$m)

6474

7367

8443

9007

9461

+14

+15

+7

+5

Earnings

1114

1575

1912

2064

2175

+41

+21

+8

+5

PER

8.4

7.7

7.3

The MPS Universe of 49 emerging ASX gold stocks has the following pre-capital funding figures using the current A$ gold price of A$1596/oz:

FY16

FY 17

FY18

FY19

FY20

FY 17

FY18

FY19

FY20

Gold output (koz)

524

532

9058

1883

2719

+70

+108

+44

Revenue (A$m)

575

860

1462

2946

4265

+70

+102

+45

Earnings

-451

305

311

683

982

+2

+119

+44

PER

4.6

3.0

2.5

As pointed out in previous Dawes Points #61-63 the growth in output from these emerging companies has historically provided a major boost to Australian gold production and during the 1985-1997 gold production boom typically exceeded the most optimistic production forecasts. It is apparent that once the US$ gold price resumes its upswing the gains in this Australian gold sector will be spectacular.  The move from late 1985 to April 1987 was a 1,000% increase in the ASX gold index of the time and it provides a good road map for the probable direction of the ASX Gold Sector over the next couple of years.

Dawes Points Gold Portfolio

At times that are considered important turning points in the gold sector Dawes Points has prepared a static portfolio to provide investors with a bench mark on how to play these types of bull markets. The portfolio approach provides liquidity if required, dividends from the major stocks and the prospects of strong growth from modest exposures in smaller, riskier stocks. The two previous portfolios, from the important November 2014 low and the pullback into Jan 2016, have done well:-
Portfolio performance XGD performance Difference
1 Dec 2014 +191% +155% +36%
1 Jan 2016 +69.1 +65.8 +3.3%
Dawes Points now provides a gold portfolio from these 69 stocks covered in the its universe with
  • 5 Major stocks for 50% of the portfolio
  • 5 Mid size stocks for 24% of the portfolio
  • 12 Junior stocks spread for risk with 26% of the portfolio
The 1 July 2017 Portfolio has 22 stocks Let’s see what is in store for us now. Contact me to participate. Barry Dawes BSc F AusIMM MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #66 13 July 2017

Petsec Energy Ltd – Remarkable oil production opportunity

by Alison Sammes

Key Points

  • Australian E&P company has acquired two key oil permits in Yemen
  • Oil production expected from each Block in 2017
  • Substantial current reserves to allow min 7,000bopd n 2018
  • Higher throughput of >12,000bopd expected in 2019
  • US operations to achieve higher revenues from Dec Qtr 2017
  • MPS appraised value A$1.46 as 12 month price target
  • Exploration potential in Yemen is very high
  • Numerous Yemen oil fields have reservoirs in `fractured basement rocks’
  • Potential for major rerating of share price from current A$0.16
Call Martin Place Securities to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
ASX.PSA began a new corporate strategy in 2014 away from its traditional US Gulf of Mexico base with the introduction of a new MENA technical team ex Oil Search and the acquisition of portion of the Al Barqa Block 7 exploration tenement in Yemen from ASX:AWE.  Petsec subsequently purchased of 100% of the Block from ASX:OSH, Mitsui and Kuwait’s national oil company Kufpec. Petsec followed this with the acquisition of the Damis Block S-1 production tenement with its 20,000bopd production facility on the An Nagyah field which had around 23million barrels of recoverable oil remaining and nearby undeveloped oil fields totalling 35 million barrels and 600BCF gas. The MENA technical and management team has had as much as 20 years operating experience in Yemen and were responsible for designing and drilling almost 50 wells on behalf of Oil Search. Petsec is now planning oil production in Yemen before end 2017 and should also experience the start of a growing cashflow again from its US operations. The results should be very beneficial for Petsec and could even be spectacular. Damis Block – S1 and surrounding fields and infrastructure Source:PSA These two tenements are well known to Petsec and the potentially >110million barrel Al Meashar discovery was drilled by Petsec’s now-current MENA team. With these two blocks Petsec now has potential oil production from each in the next six to nine months. Each block has the potential to produce substantial cashflows for Petsec that would match the company’s current market capitalisation in 2018 and far exceed it in 2019. Yemen’s geology reflects the abundant and unquestionably high quality source rock that has provided the carbonaceous source to oil formation throughout the Persian Gulf region but it also reflects massive regional tectonic activity that has literally shattered much of the brittle crystalline rocks such as granites and high grade metamorphics.   Oil from the source rocks has entered the intensive fracturing joints which have in many cases become very large reservoirs for oil entrapment.   The Masila oilfield region has several fractured reservoir fields totalling over 2 billion barrels and many of the post- 2000 oil discoveries in Yemen have been in such reservoirs. The abundance of high quality source rock indicates a much higher probability of any potential trap being charged with oil. Consequently these fractured basement reservoirs offer the potential of oil fields with hundreds of millions of barrels of oil.   ` Fractured Granites at Surface in Yemen Source: Oil Search The Al Meashar discoveries in Block 7 had an 800m oil column down to total well depth(no oil-water contact was encountered so this is still `open’ at depth) with much of this in fractured basement. Al Meashar Wells 1 and 2 with Reservoir Estimate Targets Source: PSA This field is only 14km from Austrian oil company OMV’s Habban oil field that has a 945m oil column in fractured basement and reserves of 170 million barrels in a very similar geological environment. The An Nagya field is a `conventional’ oil field but it also has potential for fractured basement reservoirs beneath it. An Nagyah Oilfield with vertical and horizontal wells Source:PSA `PSA is following Oil Search, now a major LNG producer out of PNG that in 2000 had also set up a Yemen portfolio and drilling ~50(including 12 exploration) wells. PSA, unlike Oil Search, has acquired 100% of existing or producing fields and infrastructure (as well as the experienced management and technical teams) on very modest outlays and so eliminated most capital expenditure risk. The parameters set by Oil Search for a Yemen portfolio are otherwise the same:
  • World class petroleum system –success rates >30%
  • Acceptable fiscal regime within conventional PSA terms
  • Access to producing infrastructure in key areas
  • Relatively under-explored petroleum basins
  • Recent discoveries and new developments
  • Low capex and opex (typically <US$<5/bbl and <US$10/bbl)
  • Active and established E & P industry’
I have prepared a thorough research report on Petsec Energy that represents due diligence carried out prior and after the underwriting of the A$11m rights issue by Petsec in December 2016. The Appraised Value 12 month share price target is A$1.46. The link is here:- http://www.mpsecurities.com.au/petsec-energy-research-report-13-june-2017-final/ The author and Martin Place Securities hold shares in Petsec Energy at the time of this report. The political position in Yemen has been uncertain since early 2014 when a rebellion led to curtailment of a wide range of business activities and the cessation of oil tanker liftings from Yemen’s four oil export terminals. Yemen oil production was essentially shut down. In recent times the rebellious regions have contracted to the north west on the border with Saudi Arabia and a small area on the Red Sea and well away from Petsec’s Block S-1 and Block 7 tenements. Petsec Energy’s Tenements and Yemen Pipeline and Port Infrastructure Improving prospects for a peaceful resolution in the hostilities allowed the Yemen Government’s national oil company Petro Masila in August 2016 to recommence oil production in the Masila oil fields in the eastern half of Yemen, well away from the disputed regions of the Shiite Houthi rebels near the northwest border with Sunni Saudi Arabia. Oil production is now around a reported 75,000 barrels per day and is pumped via the 138km Ash Shihr pipeline and allowing resumption of oil exports.  Shipping has resumed and an estimated six million barrels have now been lifted since August 2016 without incident. Petsec’s An Nagyah field has 15 shut in oil wells and 20,000bopd processing capacity that are linked to the major Marib pipeline that runs 438km to the Red Sea but this pipeline is closed and is not considered likely to be reopened before 2019. However, Petsec considers that it will receive official confirmation of its work plan during the Sept Qtr 2017 that will allow installation of a truck filling gantry (July) and a commencement of trucking convoys to Petro Masila oil fields and gaining access to the Ash Shihr pipeline for export. The Yemen Government has historically relied on oil revenues for around 60% of its Budget income and in the current environment has encouraged foreign companies to resume oil production. An Nagyah in Damis Block S-1 has 20,000bopd capacity today and should be able to re open wells to commence at 5,000bopd and steadily build up to 20,000bopd from existing wells and additional infill and appraisal wells.  The additional undeveloped resources should ensure the capacity of processing facility is filled. Damis Block S-1 Reserves The two Al Meashar wells should provide at least 1,000bopd while production testing.  The exploration potential in Block 7 is very high as these unrisked targets show. Petsec should receive about 63% of the fields oil revenues under the Production Sharing Agreement to cover authorised capital and operating costs and its ~29% of the oil field profit.  All sales receipts are received offshore to Petsec’s account.  These cashflows should allow the drilling of infill wells and subsequently some exploration wells on structures that have >100m million barrel targets. I have done considerable due diligence on this company’s operations and consider it an absolutely outstanding opportunity. There is a large amount of information to absorb to fully understand the opportunity here but I can say that the numbers are very high and the risks are surprisingly low. The key issues are that:- 1) Yemen is an early stage exploration target with underexplored basins and huge volumes of source rock 2) The MENA staff at Petsec spent over 10 years drilling wells here with Oil Search so they know the people, the local situation and the geological potential. The stock is A$0.15 and my target of A$1.46 is only notional and only uses the Low Case of 5,000bopd in Yemen. A perfectly rational high case could be >A$10/share. The PER for 2018 calendar Year is <1x and operating costs are <US$15/bbl and these would fall to about US$10/bbl once output is linked to a pipeline, probably in 2019. Looking at it dispassionately , it is clear that once production begins at An Nagyah, Petsec will be generating a lot of cash from low cost operations and should become something of a super stock.  Next to no capex is required and the two Blocks have accessible reserves ready for production and have very substantial upside. The oilfields and basins in Yemen are only in the early stages of exploration when large structures are being tested and, given the undoubted high quality of the Arabian Peninsula source rocks, it will certainly mean large oilfields are to be found.   The Hunt Jannah Block (to the west) and the Masila fields (to the east) are each over 2bn bbls. The existing fields are significant and in the experience of most operators in this basin it seems that they simply become much larger than initially thought. The Petsec MENA team led by Maki Petkovski have actually been the operators here in Yemen for many years through Oil Search so they know the geology, drilled many of the wells and most importantly, know the bureaucrats, local businessmen and politicians who make things happen in Yemen. The Yemen assets are almost beyond comparison with petroleum exploration prospects in Australia or in the very mature shallow Gulf of Mexico basins so the opportunities brought into Petsec are practically without peer for any ASX-listed company. Risk is in the eye of the beholder and whilst the entire Middle East is unstable and hostilities continue in the north west of Yemen the operations of Petsec should be able to work within a supportive community and government umbrella to resume output and apply risk capital, probably through farmins, to drill some of the indisputably attractive exploration/development targets. Petsec has acquired these magnificent assets and should production resume at An Nagyah as planned and Al Meashar deliver even modest reserves the upside is very high. Oil prices are currently softer on oversupply concerns but underlying demand has been rising faster than most forecasts so the medium term outlook incorporating increasing imports to China and India should not be negative for oil prices. MPS Research Report Low Case Earnings Forecasts for PSA at A$0.15. The link to the Research Report is here:- http://www.mpsecurities.com.au/petsec-energy-research-report-13-june-2017-final/ The author and Martin Place Securities hold shares in Petsec Energy at the time of this report. Barry Dawes  BSc FAusIMM (CP) MFASAA 19 June 2017

Gold – Still looking for a rise from here

by Barry Dawes

Key Points

  • US gold price up 10.3% in 2017 to US$1268/oz
  • A$ Gold price back above A$1700.
  • Asian gold demand remaining robust
  • Australian Gold production forecast up 16% to 345t for FY20
  • MPS Gold Producers Universe 17 stocks FY18 PER 7.1x, FY19 6.6x
  • Universe gold production to rise 15% to 5.2moz (excluding Newcrest) by FY19
  • Excellent opportunities in Australian Gold Stocks
  • North American stocks picking up, royalty companies leading
Preferred stocks:
ASX:NST, ASX:TBR, ASX:SBM. ASX:EVN, ASX:NCM ASX:GOR ASX:OGC, ASX:CDV, ASX:EGS, ASX:BLK, ASX:PRU, ASX:AHK, ASX:TNR, ASX:PNR, ASX:SWJ, ASX:CYL, ASX:WPG
Call Barry to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
US$ gold has continued its unseasonal May rally and is again testing the 2011 downtrend. The US$ has been weaker against the major currencies Euro, Yen, Swiss Franc, Rupee and Sterling. Gold in other currencies has remained firm and technically constructive. Gold in A$ is above A$1,700/oz. Gold stocks have had a bumpy and volatile ride over the past six months with the better stocks strong and technically very constructive whilst much of the emerging sector has been weak and friendless.  Many of the fallen are now outstanding value opportunities. The strength of the global equity markets is reinforcing a better outlook for commodities and gold will continue to benefit from rising wealth in Asia and Africa.  The Australian Gold Sector has been a leading indicator of the expanding global economic boom. The A$ gold price has provided a strong incentive for the Australian entrepreneurial mining sector to do what it does best, and gold production in Australia has again exceeded 300 tonnes and is on its way to grow at least another 15% to 345t by 2020.  The majors and mid caps are reporting production growth and a slew of merging companies are carrying out a repeat of the 1983-1990 gold production explosion when Australia went from 30tpa to 244tpa on the way to 314t by 1997. This graphic has just been updated to include newly-indentified gold mining projects and you can rest assured that many more will emerge over the next year. The growth in gold production with a A$1,700 gold price will be wonderfully profitable for existing producers and will also allow numerous smaller players to bring profitable new mines on stream and often to just deliver ore to existing nearby mills so requiring only small pre mining capital expenditure. The MPS Universe of Major Gold Producers (excluding Newcrest) of 17 stocks should have gross gold production of about 4.6moz in FY17 and this should grow to 5.2moz for FY19. The 17 stocks have a market cap of about A$17bn and should report earnings of around A$2,000m in FY18 and FY19 at A$1,700/oz.  The PER is 7.1x for FY18 and 6.6x FY19. MPS has a second universe of more than 40 emerging companies and from this data it is clear that Australian gold production will be up by almost another 1moz (34t). Do note this history from one of my reports in Jan 1989 where I forecast almost 200 tonnes for 1990.  The actual outcome was 244 tonnes and it just kept growing.  Earlier reports in 1986 and 1987 were only forecasting up to 150 tonnes.     Australian Gold Production peaked in 1997 at 314t. Source: Bain Matrix of Australian Gold Producers Jan 1989. And to reflect this, the ASX Gold Index of the time (established in about 1986 and backdated) rose from 400 in mid 1985 to its peak at 4413 in 1987.  1,000% in just 18 months! Source: Bain Matrix of Australian Gold Producers Jan 1989 The performance of the ASX:XGD was strong over 2000-2011 but Australian gold production declined 27% during that boom that was strongly influenced by companies with African gold projects. This boom will be more about the growth in Australian gold production and the +226% first leg up from late 2014 was just the beginning. The performance of the gold sector in 2017 has been volatile and the ASX:XGD is up only 7.3%.  It has produced some very mixed results with some strong performances and some awful declines. It is clear that the larger producers and the dividend payers have outperformed in the ASX:XGD. SBM, NST, EVN and WGX are the senior players and did well with CDV and NST’s EKJV partners TBR and RND also performing.  CDV has been outstanding and seems destined for even better things.  NCM is OK but is acting like the big North American gold companies. In the smaller players, KIN with some outstanding drill results performed strongly and SWJ has been a MPS favourite as has PNR.  WGP is starting to hit its straps and CYL is an emerging star. Many more new gold players are emerging and will be added to the MPS lists. Amongst the awful performers in 2017 there has certainly been some value created in SLR, BLK, PRU and DRM amongst the bigger stocks and AHK, HAV and TNR seem extremely cheap. Gold stocks are still improving their market share with some weeks in April 2017 exceeding 5% again.  Dawes Points considers that this can only rise further. In terms of technical performance the ASX:XGD is showing signs of moving higher. But some individual stocks are looking very strong and seem ready for a robust breakout very soon. ASX:NST (Northern Star) is one of my preferred plays and a break above A$5.00 should see a big move. ASX:SBM (St Barbara) is showing the same pattern. As does ASX:EVN (Evolution). ASX:CDV (Cardinal) looks very powerful. As does ASX:WGX. And late bloomer ASX:EGS. ASX:BLK (Blackham) seems to have been most unfairly treated after reporting that unusually heavy rains had reduced mining and processing activities.  Observers commenting on the history of Wiluna might like to read this from my Feb 2015 Report on BLK.  The Biox plant ran successfully at about 80-100kozpa for almost nine years and the time under Apex was clearly a matter of poor management as the mine output was well under the mill capacity and the ore was under the mine reserve grade. Gold production for BLK in FY18 should be 90-100koz and the expansion to >200kozpa should be done without resort to additional equity.  At 80kozpa with cash costs ~A$1200 and a A$1700 gold price this is A$40m cashflow and at 200kozpa this is A$100m cashflow.  Market cap is only A$106m. At A$0.31 this is very cheap.

Gold Price Outlook

It is always helpful to look at the long term for US$ gold and to keep in mind that all the reasons for holding gold are still with us:-
  • rising living standards for over 3,300m in Asia
  • immense growth in money supply.
  • sovereign debt
The power of the twelve year first leg up from US$246 up to US$1923 was truly impressive.  The pullback and consolidation over the next six years is also impressive in that gold has held up so well. The time intervals between the various moves have been trying the patience of the bulls but we are slowly but surely getting there.  Don’t despair. The power of this bull market in gold does look majestic in the time frame here. This Elliot Wave interpretation is also of great significance showing the strength into Sept 2011 and the subsequent shallow retracement. US$ Gold is pushing up against the downtrend line for a third test.   A break here could be just as powerful as the earlier moves in gold. The flow of gold into China and India is absorbing all mine production and the flow is one way.  Nothing is coming back.  This is the main driver.  The gold held by the Bank of England has declined. And the flow is one way only. At the same time this flow of gold is taking place it seems that the US$ is softening as shown by the US$ Index and reinforced by the above-noted weakness against the major currencies Euro, Yen, Swiss Franc, Rupee and Sterling

North American Gold Stocks

The lack of leadership and market interest in the Australian Gold Sector at present forces attention on the North American markets. The best indicators have been the ETFs for the larger stocks (GDX) and the next level of stocks in the GDXJ. However, it is notable that amongst the best performing stocks have been the gold royalty companies Royal Gold and Franco-Nevada. (I am looking at building a gold royalty company here so if anyone is interested you might like to give me a call.) Both of these look very constructive. The royalty companies are leading:- Franco-Nevada And Royal Gold:- Top North American-listed performers include:- Agnico Eagle Mines:- And Kinross Gold Corp:- Randgold:- The really big US companies Barrick and Newmont have tended to perform with the various indices but both seem capable of strong moves soon. Barrack Gold Corp Newmont Mining Corp The US$ Gold Price action seems constructive and its strength is matched by gold in many other currencies so that the world will be looking at a bull market for gold in all currencies. The gold stocks are also proving some good leading indicators with key stocks providing outperformance while the general market and the smaller stocks have been soft and engendering a mood of pessimism.  These market sentiment characteristics generally provide a sound base for an upward move in any market. Contact me to participate. Barry Dawes  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #65 29 May 2017 I own NST, BLK, AHK, EVN, CYL, TNR, TBR, CDV,SWJ

Gold stocks still very attractive #64

by Barry Dawes

Key Points

  • Don't be put off by gold sector volatility
  • Recent sell offs in gold equities give excellent buying opportunity
  • Gold price in most currencies still in firm uptrend
  • Global economic expansion well underway
  • Major equity markets making new all time highs
  • China crude steel output hits a record high!
  • North Korea issue a furphy? KOSPI market at record highs!
  • Stock selections  ASX:NST ASX:EVN ASX:RRL ASX:RSG ASX:BLK ASX:TNR ASX:SWJ ASX:CDV ASX:JCI
Call me to discuss ways of participating bdawes@mpsecurities.com.au  +6 2 9222 9111
Action in the precious metals and gold sector equities over the past twelve months has been highly volatile and has been disguised by the net moves of a marginally lower price (~1.5%) for US$ gold, ~12% lower for US gold indices and the gain of  ~9% for the ASX:XGD Gold Index. The Quarterly Volatility (price range/last qtly close) in these same markets has been 9% for US$ gold, 21% for US gold stocks and 19% for the ASX:XGD Gold Index.  This is a lot of action. The sentiment in the sector however, especially here in the XGD, has been very poor over the past few months and some stocks have acted as if it was 2013 (-61%) MISERY TIME again.  This is on top of the 41% pullback in the XGD from its July 2016 highs to those Dec 2016 lows. This volatility makes it difficult for both investors and traders but those seeking yield and those utilising superior stock picking skills can still outperform the averages as has been the case since mid 2013. The bigger picture for these markets has been that the annual volatility in the XGD in the past decade since 2006 has actually been even higher at 28% with -21%, -26% and a -61% figures accompanying the gains of 28%, 29%, 38% and 54%. This volatility has made the sector stress-inducing and has pushed away many investors but the Dawes Points outlook is that the next decade should be much steadier with dividend paying stocks giving the market some defensive character and that higher gold prices should provide some large gains.  The typical post-new high pullback in the 2000-2008 bull market was ~25% so hopefully an upward trending market will make these sorts of pullbacks understandable and bearable. You have probably also noticed changes in the key Van Eck GDX and GDXJ ETFs have caused havoc as portfolios have had some structural changes on stock weightings.  Some stocks were increased or added and others were reduced or cut.   The triple weighted ETFs effects have been even bigger. Changes here in the ASX:XGD (S&P ASX All Ordinaries Gold Index) have seen the number of stocks rise to 27 for June Qtr 2017 after being 52 in 2011 at the top (8499 in April 2011) and just 20 at the low (1642 in November 2014).  I have asked this previously but is there anyone out there with a professional view on an index that has so much variation in the number of components? Having said that it appears the XGD at last looks like an index of gold stocks with the last non-gold company removed. With the increased population of the XGD market share of value turnover is rising above 4% and was 5% for each of the last two weeks of April. Whatever the position here it is clear that with the A$ gold price back up around A$1,700/oz and with the generally strong (despite some abnormally heavy rainfall) March Qtr reports out there some gold stocks that are just brilliant value at current levels. The tables below also show the high volatility but also it is pleasing to see market outperformance by some stocks in 2017.  In particular, two stocks referred to in Dawes Points in 2017, CDV (+104%) and SWJ (+68%) have provided some of the best performances and Dawes Points-preferred stocks NST and TBR/RND developing the Zuleika Shear gold fields, low cost SBM, WGX, GOR and PNR have also shone through. Site visit was made in February this year to CDV's Namdini Project in Ghana where the 4moz deposit has had drilling indicating depth extension from 350m to 550m and potential additional mineralisation along strike.   Market cap is around A$200m so with 6moz or more  we could be looking at A$35-40/ inferred oz.  The key feature here is the mineralising fluids passing through metamorphosed sediments, volcanics and intrusives to give 30-50m intersections.  Gold recoveries are straight forward and the strip ratio is low. Gold Fields has bought 6.4% on market plus a further 7% through listed options. A site visit to Stonewall's (SWJ:ASX) projects at Pilgrim's Rest in Eastern Transvaal provided further evidence of a major gold field here with 7moz already extracted from 43 mines over a strike length of 60km.  SWJ has released 905koz @ 11.1g/t at Rietfontien and 1.0moz @ 6.6g/t at the Beta Mine but these are just the start.  Gold production is scheduled for 2018 from upgraded existing facilities.  Substantial upside possible here. NST's Zuleika Shear activities have been outstanding with the high grade Rubicon-Hornet-Pegasus and Raleigh mines in the EKJV producing excellent production results but more importantly, exploration drilling at all these mines will result in a significant resource upgrade. NST will have the new 100% 50kozpa Millennium mine producing development ore by in the Sept Qtr.  NST also has a very active exploration programme along the Zuleika Shear with seven rigs drilling out a resource at the very exciting Paradigm project (107m @3.1g/t and 197m @2.4g/t) . This goldfield will just get better!  Don't forget ASX:TNR which is very well positioned here too. Special mention is also made of HAV and ABU since 1 July 2016. Dawes Points has had a couple of false starts with suggestions of gold stocks moving higher in a new upleg but with the recent pullbacks  it now seems clear that time frames are longer than expected so short term rapid gains are not yet with us. However, investors should note that many ASX Small Caps are being hammered so it is not just gold stocks! ASX XEC  S&P Emerging Companies Index 2002 -2017 This also suggests these stocks are now in coming into strong support levels and trading on good volumes. Nevertheless the outlook is unchanged. Gold demand from China and India continues unabated and is absorbing new mine production and Western inventories. The Fear Trade of banking collapses, Middle East problems, North Korea and debasement of currencies are also there but are not as relevant just now. The Bank of England recently released details of gold it holds on behalf central banks and commercial banks. I am not really sure what it actually means but it could be reinforcing the transfer of gold from the West to the East.  Almost 2,000t was removed from 2013 …… …with another 800t exitting the SPDR Gold ETF over much the same period... Substantial tonnages of gold have moved East and have been tightening the market in the West. The underlying strength in the US$ gold is being reflected in the gold price in other currencies and most are a few % stronger against the US$. Gold in US$ is just looking brilliant and a sustained break above US$1270 and more importantly above US$1300 should see a very strong move. The internal strength of US$ gold with the 2011 high interpreted as an `irregular' B Wave and the 2011 downtrend ready to be broken is very encouraging.  The next upmove if it happens will be a Wave 3 which is typically very strong. As noted, the trend though the various currencies is in line with this and A$ gold is already moving up.   A$ gold has averaged around A$1,550 for the past six years and A$1,600 for the past two.  The move back up through A$1,700 is suggesting much more to come. Note two important currencies where gold prices look to break much higher.

Gold in Euros.

Gold in Yen.

And most importantly in Indian Rupees, the currency of the biggest buyer of gold! India has the biggest demand for gold and gold is rising again in Rupees despite that currency rising against the US$.

Economic Outlook

Dawes Points continues to push the Global Economic Boom thesis and is encouraged by some very important recent data. The One Belt One Road (`Belt Road') across Asia to Europe is gaining traction with infrastructure spending picking up everywhere and is best displayed by crude steel production in China which hit a new record high rate of 847mtpa in March 2017. India achieved 108mtpa in March after finally exceeding the magic 100mtpa in January and will very soon pass Japan to become the world's second largest steel producer. China can not only be expected to have robust steel production but should see at least 5% growth in 2017 as this seasonal turning point has occurred at such a high output level. Investors seeking a play in this Asia-MENA infrastructure play should look at recent listing JC International (ASX:JCI) Calendar 2016 EPS A$0.16, Cal 2017 (E) A$0.18 and PER 4.5x. Iron ore prices, particularly sub-60% Fe ores, have been weak but as the low grade China port stockpiles are run down at these attractive prices it can be expected that iron ore prices will be firmer into the Dec Half of 2017. Higher grade iron ore products such as magnetite are in strong demand and the South Australia potential mega projects Iron Road ASX:IRD, Magnetite Mines ASX:MGT, Carpentaria ASX:ASX and Havilah ASX:HAV deserve further attention. The US economy appears to be gaining strength through housing, manufacturing and employment but it is interesting to see on the aggregate consumption side how the US Transportation Sector has increased its share of total primary energy by 30% since 1990 from 25% to around 33% today and the underlying growth in consumption has a robustness about it. It has been notable over the past couple of years that consumption of transportation fuels has shown double digit growth in many major economies.  The underlying demand for oil is probably far stronger that the market place appreciates.  Global consumption is now just over 95 MMbopd (~35bn bbls pa) and growing at 1.2-1.3MMbopd so it is going to be difficult to maintain output in the next few years.  Keep in mind Australia's largest oilfield was Kingfish in the Bass Strait with all of about 1.1bn bbls and Bass Strait itself has produced over 4bn bbls. Whilst Peak Oil is no longer fashionable it must be recognised that most conventional reservoirs outside of the Middle East are in decline and the exploration and development outlook for near term new non-OPEC oil supply is at the lowest level since the 1940s. The graphic below shows that in the past five years less than 6bn bbls per year has been found. Demand is still rising but supply is struggling to keep up. All these numbers, together with the aggregate figures given on consumption of the industrial metals suggests that the overall global production to reserves equation is increasing.  Higher prices are inevitable. So many markets are making new highs from the US, Europe, India and ASEAN and reflect strong underlying economic conditions. It is interesting that the North Korea issue is not rating highly on the market's radar. Most importantly, the Sth Korean KOSPI Index is hitting new record highs! What do they know that we don't?  Is reunification now about to happen? There is no FEAR trade here! Someone needs to turn on the lights! Barry Dawes BSc F Aus IMM (CP) MSAFAA I own JCI  NST, BLK, SWJ, TBR, TNR, CDV Call me if you would like to:-
  • Set up a portfolio
  • Participate in Section 708 capital raisings for sophisticated investors
+61 29222 9111 bdawes@mpsecurities.com.au Dawes Points #64 2 May 2017

Steel Output Indicating Asian Boom Continuing #63

by Barry Dawes

Key Points

  • Global equity markets breaking through major resistance to new all time highs
  • China, India, ASEAN, Africa make up 48% of global GDP and growing
  • US housing starts robust and housing sector stocks making 11 year highs
  • World Feb 17 steel up 4.1% over Feb 16 (+7.8% annualised for 28 days vs 29 in 2016)
  • China Feb 17 steel output 798mtpa up 4.6% YoY (+8.1% annualised)
  • Rate of change indicators suggesting further steel production growth in 2017
  • Non-OECD now exceeds 70% of global steel consumption
  • Indian crude steel output exceeds 100mtpa for first time in Jan 17
  • Iron ore price still exceeding US$80/t basis 62% Fe CIF
  • All Ords targets above 7500 (+30%) by end 2019.
  • Important stocks are ASX:BHP ASX:RIO ASX:FMG ASX:S32 ASX: NST ASX:WSA ASX:MLX ASX:MGT
  • Gold sector BUY recommendation reinforced
Call me to discuss ways of participating  bdawes@mpsecurities.com.au  +6 2 9222 9111 At a time when the financial world seems to be mesmerised by the actions of (and the reactions to) the new Trump Administration in the US, concerned over rises in interest rates and also with renewed and increasing calls for an impending `US stock market crash', the global economy of at least 4,500m other people seems to be following its own course and is doing just fine. In fact, the foundations for the Dawes Points Global Boom seem stronger than ever. Major equity indices around the world are making new all time highs and those in Asia are breaking out upwards after long periods on consolidation. World steel output is showing encouraging growth and is indicating the Asian Boom is continuing.  Australian stocks and the A$ should soon be reflecting all this. Do review the price action in the major indices and note, at least from my experience and perspective, none appears to be overbought or over extended enough to produce the conditions that leads to sharp corrections.  Rising Fed Funds Rate and rising bond yields are positive economic signs and encourage maturing bonds to be redeployed elsewhere and into equities in particular. Earlier this year Dawes Points highlighted the rise and rise of the new growth regions as they took an ever greater share of global GDP. ASEAN and the other `Asian Tiger Economies' of the 1990s were joined by China in what became a 15 year economic expansion and as we view the next decade ahead we see India finally coming into the picture and we see Africa adding some perhaps unexpected spice in the very near future. Since 2000, the regions have doubled their combined share of nominal global GDP to almost 40%.  Sub-Sahara Africa has slowed in recent years but recent higher copper, gold and oil prices have provided new boosts and growth numbers should surprise many. Population growth has also been important.  These regions make up a growing 58% of the world's population. So seeing 3,300m Asians joining via the One Belt One Road concept with another 1,200m in Europe and indirectly, 900m in Africa, makes concentrating on 330m people in the US somewhat misplaced. Be aware of the influence of these countries in the Asian Century. IMF data 2015 So coming back to steel. The global steel industry is a fundamental indicator of industrial activity and the World Steel Association monthly data gives some of the best near-real time evidence of the world economy. The Feb 2017 figures have provided a 4.1% YoY gain but this is actually an annualised rate of 7.8% higher adjusting for the 29 days in Feb 2016. Looking the annualised China vs USA crude steel graphic it is clear China has maintained crude steel production at about 800mtpa for the past three years while the US has remained around 80mtpa. Looking more closely at the data, the obvious seasonal influences of Christmas (China is the fourth(?) largest Christian country) and the moving feast Spring Festival (Chinese New Year) soon after can result in long holiday periods and produce some remarkable seasonal variations but the smoothing 12 month and six month moving averages provide some key forecasting indicators. The six month moving averages allowed Dawes Points to call an upturn in China crude steel production early in 2016 and, after closely watching depleted steel mill steel and iron ore inventories, forecast a strong rise in iron ore prices to above US$80/t in 2016. This same data series is suggesting a good year for steel in China in 2017 with the latest data showing crude steel production for Jan and Feb to be 7.6% higher than 2016. The blue short term indicator is suggesting a seasonal bottoming but the red 12 mth moving average is well up and rising. The bigger picture says Non-OECD consumption is the key to global raw material demand and this graphic speaks volumes. Over 70% of steel is consumed outside of the OECD. The US produces about 80mtpa of steel from mostly electric arc furnaces (EAFs - 55% of capacity) that use steel scrap rather than virgin iron ore (in blast furnaces) and imports about 40mtpa.  An infrastructure programme might restart maybe 10mtpa of shut capacity but imports may have to rise by another 30-40mtpa. China has been the biggest growth story in steel production with the massive rise (just using the data from the graphic above) from 300mtpa in 2005 to the current 800mtpa with almost 95% coming from blast furnace iron. However, after a long period of promises, India finally exceeded 100mtpa in Jan 2017 and should grow more from here and play another important role.  Interestingly, over 50% of Indian crude steel comes from EAFs and with steel scrap reasonably tight India will be forced to increase the share for blast furnaces.  And iron ore. Japan and Rep of Korea have 23 and 30% EAF share. Iron ore demand can only increase and that for seaborne trade in iron ore to rise even faster. The Dawes Points forecast for US$95/t in 2017 has already been exceeded so after this more recent softness expect to see US$100 achieved later this year.  Demand is strong and supply is growing but not growing fast enough.  Marginal demand gives marginal prices.  Cost of production is irrelevant.  BHP, RIO and FMG will just print money. Keep Magnetite in mind.  Several new Australian iron ore projects are being developed as the next wave of iron ore capacity with three substantial developments planning to export through ports in South Australia.  Each will be developing a low cost mining operation from very different ores compared to the hard Pilbara types and will have magnetic separation as a key factor.   Magnetite concentrates are a mining product not an ore and can pick up a US$20 premium over 62% Pilbara hematites.   ASX:MGT in particular deserves attention.

Global Equity Markets

The equity indices around the world are suggesting something we have not previously seen in the major economic expansion since 2000. Expansion in market breadth!!! Firstly, look at the Dow Theory markets. The Utilities move first as power and water consumption increase as industrial output begins rising. This market is moving nicely to new highs confirming economic expansion. Shipments of goods are rising and are reflected in the Transports that are also making new highs. The Dow Jones 30 Industrials (DJIA) is making new highs showing that output and shipments are up and new employees and capex opportunities are being taken onboard as cashflows and earnings rise. Note that the DJIA is near the top of the lower trend channel but there remains massive space for this index to reach the upper uptrends of the next two channels.  I see no real overextending here. The S&P 500 is doing its job OK but the performance of the Russell 2000 Small Caps Index is providing that important BREADTH to the market to show all sectors are firing. Key indicators of economic expansion highlighted in Dawes Points include US housing starts (and the massive inventory shortage) and the Philadelphia Housing Index hitting new 11 year highs, the relative strength of the US Banking Sector and the peaking of the global bond markets. All are flashing US economic boom! The performances of cyclicals such as Boeing and Caterpillar with new basic industry stalwarts Microsoft and Amazon on fire means the indices have much further upside. The theme for a few years now has been that the US equities are leading with Germany possibly even slightly ahead. The UK after Brexit is showing great life and strength and now has a powerful upward breakout that has very far to run yet. The entire Asian opportunity is also developing with India probably even leading the US. Japan is running its own game but the equity market is rising and heading for the 1990 highs again. China as represented by the Shanghai Composite is steadily rising after the baseless hysteria in 2015 and was so strong it did not even pull back to its long term uptrend. Hong Kong is parallelling Shanghai but is probably just a bit ahead of the Mainland. The patterns for other Asian markets strikingly similar with South Korea now providing something very special with its very recent upward break out. Even staid Singapore is on the move. Taiwan is charting its own course but is now looking for a break out surge. Thailand seems ready to fly now. Even the Philippines looks ready to go. Here in Australia we are suffering from appalling politics so the All Ords has underperformed overall but the Gold Sector and Resources generally have provided some spark and strength. The data consistently provided in Dawes Points these past few years is that the structure of the resources industry of:
  • Record consumption levels
  • High capacity utilisation rates
  • Declining ore grades adding to costs
  • Low terminal market inventories
against a background of 3,300m people wanting a higher standard of living means resources commodity demand and resources commodity prices will rise and probably beyond your imagination. Producing resource stocks and hundreds of development hopefuls and explorers will have a marvellous decade. Accordingly, unravelling of defensive investor strategies and A$1,870bn in bank deposits should ensure my 7500 target at the top of the main trend channel is achieved well before end 2019. The picture is strengthened by the resilience of the A$ and recall that just over US$0.80 is a test of the 104 year (1913-2017) downtrend again. Dawes Points #62 called for a new upleg in gold and global gold stocks but was somewhat premature but the recommendation remains and gold stocks have recovered much of the early March decline. The US$ seems to be weakening as expected and gold should gain more interest in the short term to augment the strong underlying demand from Asia and beyond. US Gold stocks are in good shape:- And the GDX ETF is ready to move much higher. The ASX:XGD is now well placed for a break out move.  This outcome could be quite robust. Call me if you would like to:-
  • Set up a portfolio
  • Participate in Section 708 capital raisings for sophisticated investors
+61 29222 9111 bdawes@mpsecurities.com.au Dawes Points #63 28 March 2017 Barry Dawes BSc F AusIMM (CP) MSAA I own or control in portfolios all the stocks mentioned in this report.