Tag: DRM

Australian Gold Sector Surges 19% so far in 2016 – Much more to come

by Barry Dawes

Key Points

  • Underweight market causes massive buying rush
  • Gold Index made up 14% of All Ords turnover in past two weeks
  • ASX 300 Gold Index pushes through 3000 – much more to come
  • Dawes Points 2016 Gold Portfolio up 19.8% this year
  • Dawes Points 2015 Gold Portfolio up 102% since 4 Dec 2014
  • Paradigm is Co Lead Manager on the Golden Eagle A$4.4m IPO – get in soon!
  • Do you have enough gold stocks?
  • This is only starting, so call me now to get set –
Here is a link to a new account set up - it can be done in a day! The Dawes Points view on gold stocks has been consistently pushing Australian growth stories where rising output, falling costs and revitalised managements have made compelling investment cases. The low PERs, the high cash levels supporting a growing dividend stream and some excellent exploration stories for these companies that have also benefitted from the lower A$ giving an A$ gold price of over A$1,500/oz.  Excellent circumstances for investing. The portfolios have done well with the new 2016 Dawes Points Portfolio being up 19.8% so far this year and the 2015 Portfolio up 102%.  Note these are investment positions and no trading is done. The general market place is still skittish about the US equity markets, the Shanghai market and the local banks and, well, just about everything. Our portfolios, however, are doing just fine thank you. This is the 2016 Portfolio. Following the share of market turnover of the ASX S&P 300 Gold Index has been a very useful task with this indicator giving us a great deal of confidence in the Dawes Points views. So have a look at this!  The Gold Sector made up 14% of ASX AllOrds turnover in the past 2 weeks and the 5 week moving average hit 12.6% while the 12 week is 7.5%.  Astonishing! I was happy that the downtrend had broken but the moving averages of the last peak in the sector have just been left behind. There is a massive need to BUY!  The market is drastically underweight. The Index is only just starting to move and this break above 3000 should get close to 6000 in 2016. And the Dawes Points Gold Index corrections chart is suggesting a massive rally is about to unfold. The driver is primarily that gold stocks are still very cheap against the A$ gold price. The Australian stocks are leading their North American counterparts but a high volume break out also occurred last week. And I hope you recall this very long term graphic of the Barron's Gold Mining Index back to 1940. And the North American stocks are trading at less than 25% of previous 25 year history. (plus graphic) Gold stocks will outperform gold and probably almost everything else for the next few years. The portfolio gives everyone a mix of size, liquidity, dividends, growth and risk so I am very happy to reinforce the selections. Newcrest has more gold resources than anyone else and improvements will allow resumption of dividends.  Northern Star is just brilliant and Oceania Gold has some excellent leverage. Evolution has acquired a massive swag of gold resources over the past couple of years and will be a big player in the Zuleika Shear zone. These stocks will be the dividend paying cornerstones of every pension fund for the next decade. Blackham will continue to please everyone for quite a while and my target of A$1 in my research report in early 2015 stands firm.  This is a potentially very long mine life play. Doray, Saracen, MetalsX and Gold Road among the developers are flying. Tribune is outstanding and the market place will soon cotton on to the significance of Pegasus and the East Kundana JV.  Its 140koz of gold bullion in the vaults currently worth over A$4.00 per share is an added golden bonus. The offshore players of Medusa and Resolute are just too cheap. The smaller growth players look very exciting and will be happy to talk to anyone about them. There are of course many other attractive gold stocks out there( like Dacian Gold and Perseus)  and they will be covered soon but let's just stay focussed for now.

Golden Eagle IPO

The IPO for Golden Eagle will raise A$4.4m for company holding substantial tenements along the Bullabulling Shear Zone and surrounding the 3.2moz Bullabulling resource. Those of you familiar with the highly productive but still vastly underexplored Zuleika Shear currently being made even more famous by NST and EVN might recognize a roughly parallel structure further west from Kalgoorlie but under more colluvium cover.  The Bullabulling 1g/t resource overlies some impressive higher grade drill intersections. Golden Eagle has the Geko gold deposit that has the potential of being in production in the medium term after listing and provide substantial cash flows to fund exploration on the large area of under explored tenements. You can download the Replacement Prospectus here. http://www.goldeneaglemining.com/prospectus/ Don't be put off by the Supplementary Prospectuses – it was very difficult out there late last year.  Only one resources stock was listed in 2015 and Golden Eagle could be the first gold stock listing in about three years. I won't be commenting on the US$ gold price in this Dawes Points.  It will move up strongly in its own time which I think is not too far away. I will just mention briefly however the industrial metals. No recession or downturn I ever experienced had declining LME inventories as a market signal. The continual bashing of commodities has been in contrast to record consumption levels for most metals and declining LME inventories. There are major issues in aluminium and nickel that detract from the messages from copper, lead, zinc and tin and even though their stocks are tumbling too we can only focus on how tight these markets really are. And the Australian Gold Sector is leading the world out of this miserable pricing time.  Gold stocks, gold, metals companies, industrial metals, technology metals, then oil, oil and gas companies and the bulk commodity producers will follow. So participate in the gold sector now with a good portfolio approach and let's have some real fun. I own NST, NCM, GOR, DRM, MLX, CGN, TYX, TBR, BLK, TNR, MML, RSG, GEE 8 February 2016 Edition #45  

Australian Gold Sector thriving

by Barry Dawes

Key Points

  • Gold market gaining confidence
  • Australian Gold Producers well placed
  • Paradigm Gold Portfolio was up 75.5% in 13 months to 31 Dec
  • Kalgoorlie gold region being reinvigorated
  • 2016 should see further Australian gold development resurgence
  • Long term trends may be indicating end of deflationary times
The strong performances of key ASX-listed Australian domestic gold producers have been a key feature of Dawes Points' views of the world.  Upbeat reports on production, cost reductions, earnings, cash and dividends assisting a +75% untraded weighted portfolio gain have insulated many clients from the external volatility in most other market sectors.  Exploration results have also helped for some companies. These gains in Australia have encouraged Dawes Points to consider that the actions in the global gold, gold equities, commodities and commodities equities will be following those in Australia sooner or later in the new year of 2016. The Paradigm ASX 300 Gold Index share of All Ords value turnover graphic has been of great assistance in showing that the relevance of Gold Stocks was recovering and that indeed a major turning point was coming about after a very long decline. Similar but still nascent changes seem to be underway in ASX Small Resources and also in the XMM, with prices still falling but volumes and market share increasing.  All good tentative signs. The Dawes Points 3 December 2014 untraded gold stock portfolio provided a 73.6% return for 13 months to 31 December plus almost 2% in dividends. Here is the proof. Great gains by overweighted leaders Northern Star and Evolution together with half weighted emerging companies Blackham, Saracen and Gold Road gave the portfolio most of the performance and it outperformed the ASX Gold Index by about 20 % points in value and about 0.5% in yield. It is easy to say that the local gold sector has done well because of the weaker A$ but the A$ gold price has been around A$1,500/oz for the past five years.  The recent moves above A$1,600/oz and last week's surge to A$1,588 will certainly help sentiment. The gold price at A$1,500/oz has made good earnings for many companies and I expect that the Dec Half of 2015 will bring even more gold production growth, lower operating costs and higher earnings. Expect many gold producers this month to put out early advice of good production stats ahead of the formal quarterlies. But it is not just the A$ gold price that has made these good market performances. Real effort, ingenuity and investment is involved in this local industry and here is where the industry is going with the production growth results very clear in WA which has consistently produced 65-70% of Australia's mined gold. The longer term appears robust for all Australia. In assessing the Gold Sector Portfolio, emphasis was placed on the S&P ASX 300 Gold Index to ensure investors were looking at visibility and liquidity for most chosen stocks. However, since the ASX sold its index business to S&P the resources market has never been quite the same.  The Gold Index was discarded and not resuscitated until about 2005 and then was backdated. The actual XGD Index was recently critically reviewed by Dawes Points to analyse its effectiveness. This index has been found to be an appalling collection of gold, non-gold, local and foreign listed stocks that gives no real reflection on the activity in the Australian gold industry of the past decade. So coming to the real action in the ASX Gold Index today we have a tale of two sub sectors:- Domestic gold producers; and locally domiciled companies with offshore gold production. The ASX 300 Gold Index currently has 22 stocks.  Ten are gold-only plays domiciled in Australia and operating mostly Australian gold mines.  Eight are Australian domiciled and operate mines offshore.  Two are foreign domiciled and have all or mostly foreign gold mining operations.  One is a diversified miner with local gold production and one is a diamond mine developer. Look at this. First of all, note the June 2013 low that I have often mentioned!    An unweighted index of up to ten Australian local producers is up 165% since that low. The eight offshore producers are down exactly 50%.  The Index itself is up just 28%. Where did you want to be in this index?  Clearly with Australian gold companies producing locally. The other four stocks in this 24 stock universe have little or no relationship with the Australian Gold Index. What a misallocation of resources.  What would be the interest in ASX gold stocks be if the ASX Gold Index actually reflected these strong gains and the activity in the Australian gold industry itself! ASX investors should be able to invest in confidence in Australian companies involved in the gold industry. Australia is the second largest producer of gold, after China, and the opportunities should be large and many.  A decade ago, almost two thirds of Australia's gold production was owned by overseas domiciled gold companies.  Recently, substantial gold production assets have come back to Australia through sell downs and acquisition by Northern Star, Evolution and MetalsX. Everyone should be investing in this production growth and not, as suggested by the ASX 300 Gold Index, in some foreign domiciled offshore producer and certainly not in an offshore uranium prospect.  Or in a coal miner, iron ore producer, or a gas company. Actually, the story of these Australian gold producers gets better. These terrific ten Australian gold producers make up over 90% of the XGD turnover and as noted above this is now back up to around 2% of All Ords turnover. Makes the current makeup of the XGD Index look silly. Well, my 2016 portfolio will still emphasise most of these top ten (eight actually) with a few more that should soon come into the XGD:- Only three of the offshore producers make the grade for the portfolio. I have added some emerging stars to give us the Dawes Points 2016 Gold Stock Portfolio for a A$100,000 portfolio.  $40% in the larger stocks, 30% in mid caps, 20% in growth opportunities and 10% in minnows. I am taking the 31 Dec as the start date so let's follow the performance over the year and compare it with the 2015 Portfolio. I would like to refer to two other minnows that wouldn't fit in the Gold Portfolio but could provide some excitement in 2016.  Mustang Resources (MUS.ASX) has some very high quality projects in Mozambique that include rubies and diamonds. Alt Resources (ARS.ASX) is a recently listed explorer with an outstanding copper porphyry target near Cooma in the Snowy Mountains on NSW.

The Big Picture

The current sell-offs in commodity and equity markets continue the bearish trend of the past few years and we all are experiencing tough times outside these local gold stocks. But these gold stocks are showing that not all is dismal and pessimistic. The big picture for gold remains that market sentiment remains poor and most professional investors have been out and probably short since the highs in 2011. We have now had over four years of declining US$ gold prices and all manner of uptrends have been broken.  However, the graphic below shows US$ gold is almost bouncing off the US$1032 high of the GFC in March 2008.  This may be very important.  The momentum and sentiment indicators are good enough for the gold price to have completed most of its decline and to bounce and renew the bull market. Long Term Gold Price from 1980. The US Fed has begun its interest rate hikes as that economy strengthens.  The evidence is clear that this is a sub normal recovery but the deleveraging has been substantial at personal and government levels and even the US Budget Deficit seems to now be 40% lower than just a few years ago.  Savings rates around the world have improved balance sheets everywhere.  The US$18trillion debt is still there but the bond market is still signalling that higher yields are in store over the next few years. Rising bond yields after such an extended period of easy money will be reinforcing the probabilities of the end to the deflationary days and a pick up in inflation. Over US$90trillion of capital is tied up in government and corporate bonds.  This is a massive source of capital and when coupled with the global cash levels, there should be strong flows of capital out of cash and bonds to gold when sentiment changes. US 10 Year Bond Prices - Weekly The market for gold is now driven by the Love Trade for jewellery in India and China and is likely to do so for quite some time. From this graphic it is easy to see that most of the world's 170,000 tonnes of gold is held as jewellery and demand for gold into India is insatiable. China in 2015 according to Koos Jansen at Bullion Star had another record year of imports (~1,200tpa) and domestic withdrawals (2,405t ytd) through the Shanghai Gold Exchange. World mine production is only about 3100t so between them China and India absorb all mine production. Coin demand remains robust and silver coins mint production in North America has maintained the very high levels of 2013 and 2014 to meet this strong demand. This Supply and Demand for Gold for the Next Ten Years strongly suggests a tight market for gold will exist for quite some time. You will be familiar with graphics of the Philadelphia Gold Index (XAU) that is showing an index level that is almost as low as that at the US$248/oz low in 2000. My reading of this indicates we are near the lows in these major North American gold stocks and if the market is completing the Wave 2 correction then the upside should be strong and should follow what we have already seen in the Australian Gold Production Sector above. The market is currently all about sentiment and the sentiment has not yet turned favourably towards gold but that change cannot be too far away now and the response could be rapid. This strong view for North American gold stocks is supported by the very long term graphic for the Barron's Gold Mining Index which goes back to 1940. An excellent long term uptrend is matching support of 2000 and is also about the same as highs in 1969! Readers will probably be also familiar with the XAU vs the S&P500 whereby gold stocks there have fallen 90% against the S&P500. We can look again at the S&P500 against all commodities (CRB Index) and extreme is the only word that can apply! And market sentiment shows it very well. Finally, four major indices that don't look as if they are about to crash.
Shanghai Germany
India Japan
The Paradigm Gold Portfolio has performed well in 2015 and by my assessment the stocks are cheap on PERs and yields and well as having the lower A$ protection and production growth. As noted, this portfolio performance has underpinned the optimism of this newsletter and as noted on a recent CNBC interview  appearance, it was hard to be overall bearish when the portfolio was doing so well. Of course the Non Gold sectors have been horrible despite record exports, imports and consumption for almost all the industrial metals and for iron ore.  Please note that LME inventories have continued their medium term declines (other than some obvious warehouse transfers from stale bulls(?)) and this reflects the record consumption and limited new supply. Oil, iron ore and coal have seen substantial investment in new capacity so the concept of oversupply against firm demand has applied.  More on oil at a later date and but you should note this data :-
  • double digit growth in consumption of transportation fuels in many countries in 2015,
  • the ~1.8% total increase in global oil consumption in 2015 and more in 2016
  • the 64% decline in the Baker Hughes US oil rig count in Calendar 2015(52% fall for gas rigs)
  •  the 30% decline crude oil output since  the peak in Dec 2014 in key Eagle Ford tight oil field.
  • Global crude oil stocks are high but are still only 6-8% above the five year averages
All make fascinating reading and the issues developing between Iran and Saudi Arabia may yet become a major issue for Saudi oil production.   Note too the big bond issues to prop up the Saudi budget, local petrol price subsidies significantly reduced there and also the discussions on selling assets, including listing 5% of Saudi Aramco oil company with its 260bn bbls of reserves.  Saudi Arabia might also be raising cash to fund military activities. Oil is back to the 2008 lows and also the highs of the 1990s.  May soon be time to call a bottom here. Markets are always difficult to assess but true value always wins. You can contact me at bdawes@psec.com.au or +61 2 9222 9111. I own: NST, BLK, GOR, MLX, TBR, DRM, MML, RSG, CGN, GEE, TNR, TYX, MUS, ARS Edition #44

The bottoming process for the upturn is getting stronger

by Alison Sammes
  • Gold sector leading the market upturn
  • Gold stock market action confirming new year long bull market
  • Major players in gold physical market covering shorts
  • Australian Gold Index up 46% since 1 December 2014
  • Paradigm Portfolio is up 78%
  • Resources turnover market share downtrends decisively broken
  • Global economic activity still lively
  • Global bond market continuing to roll over into bear market
  • Further STRONG BUY signal for Australia gold stocks
  • Preferred stocks NST, EVN, MLX, BLK, DRM, DCN, MML, RSG
  • Smaller plays with  TNR, TYX, PNR
Robust market action is signalling Australian Gold Stocks are leading the global recovery in resources stocks.  Resources equities are also displaying non confirmation of the weaknesses in physical commodity prices and the underlying demand for resources raw materials continues to make new records in consumption.  Continuing declines in LME inventories suggest physical demand is at odds with the negativity infecting futures markets and some sharp upside resolution may be at hand. Furthermore, recent COMEX participation trends in gold and silver futures are showing massive short covering and new long positions being set by commercial traders while the general poor sentiment has encouraged speculators and hedge funds to increase their bearish bets. A major change is likely to develop soon. In the past 12 months since the important 6 November 2014 low at 1642 the ASX 300 Gold Index (XGD) has provided a 51% index gain and the Paradigm 1 Dec 2014 nontraded 17 company gold stock portfolio is up 72.3% unweighted (including 1.2% in dividends) and 78.6% weighted (including 2.0% in dividends) against XGD's 46% gain from 1 Dec 2014.  XGD is up 21% from 1 January 2015. The XGD is barely above the levels of 2003 and PERs and yields are now very attractive for this sector.  Also the buybacks of so many Australian gold mines from the likes of Barrick and Newmont is actually giving domestic companies a more significant share of Australian gold production again. The A$ below US$0.75 has provided an average gold price of around A$1,550 so far in 2015 and helped a large build up in cash for gold producers. Dividends are flowing again. Gold production in Australia is increasing and several new important expansions should see further growth over the next several years. Source: BREE and Paradigm estimates The action in the gold share market here in Australia is strongly suggestive of the bottoming process being mature and the real long term uptrend in gold and gold stocks is resuming. As stated, this market action is very constructive and an improvement is being noted in market breadth, smaller stocks are running and investors are taking up capital raisings again. I actually have my first gold sector IPO sponsorship since 2007 now underway with A$4.2m for Golden Eagle Mining coming soon. The market action is very encouraging with XGD's share of All Ordinaries market $ turnover now well over 2% again and looking to double from here. The prospects for earnings and dividends is what drives stock prices and gold companies always have also had the option value of a higher gold price or increased resources.  The prospects in recent years have been quite the opposite so all option value has been squeezed out and value is now substantial. The prospects now are greatly enhanced but sentiment is still very poor so the opportunity has ''once in a generation'' status. The XGD is still 70% below the April 2011 high when A$ gold was A$1408/oz.  It is now A$1550. As always, it is important to put all market action in to perspective and to consider what the markets are really telling us. Again, the adage, `heed the markets, not the commentators' has helped so much. The markets are also saying that the physical demand from India and China is strongly underpinning demand and that, in great contrast, the record level of over 300 futures contract ounces sold for each deliverable ounce registered on COMEX says a serious mismatch might just develop along the way. The current market is not a just a random point in time but a manifestation of the long term global outlook but coloured by today's sentiment. Returning to my previously published long term themes we can note that the oil price bottomed at around US$10/bbl in Dec Qtr 1998 and then had almost 10 years of rising prices before peaking at US$147 in May 2008.   The CRB index of commodities (itself highly skewed to energy) showed a similar rise. The forces behind the commodity bull market were global growth and the remarkable entry of China and its voracious demand for raw materials.  From the resource sector perspective, the rise of the steel industry in China to over 800mtpa and China being responsible for the consumption of around 50% of most industrial metals dwarfed anything in modern economic history. Export volumes and market prices were very strong and the marginal increases in demand required marginal increases in output and often these marginal increases were from marginal projects. So a slowing in demand growth created a change in the market momentum and sentiment and brought about a sharp fall in prices and over seven years of bear market since mid 2008. The speculative blip was 2010-2011 but this has now been thoroughly squeezed out. We can see this in the performances of the various resources indices in terms of price but we can see this even more painfully in the declining share of ASX market turnover. Mining and Metals had 25-30% of turnover for 2007 to 2012 with spikes to 35%.  Its down to just 13% now.  Google, Apple, Tesla and banks have been far more attractive to investors. But this downtrend has now broken and like the Gold Sector is attracting accumulation. However, we should all note that the real reason for this improvement is what Dawes Points has been saying all along. The Chinese economy is still growing and with the important One Road One Belt Silk Road concept the demand for raw materials will be maintained and will continue to grow. Crude steel production has held up well against the calls for a major fall but surging steel exports to ASEAN and to the numerous China-sponsored infrastructure projects in many parts of the world have hidden weaker internal demand. Nevertheless there has been a major drawdown of iron ore  inventory on the part of the steel mills in China, a drawdown in the port stocks in China from over 110mt to under 90mt and all the major producers have run down their own mine and port stocks.   Obviously the high cost exporters around the world have stopped and domestic magnetite concentrate production in China is falling sharply at last. I had expected a short cover rally in iron ore in this half year as this inventory reduction is readjusted upwards but it hasn't eventuated. Consumption of most metals however is still at record or near record levels and LME inventories continue their declines. This is not the stuff of recessions and major declines in economic activity. The GFC only spurred China onward but its 1,375m people have had a taste of a better life and this can only grow stronger. China has also the long term goals of its westward-looking agenda that aims to link not only the 3,300 mi people Dawes Points referred to over the past few months but to Europe linking another 1,100m to East Asia. In today's crisis with IS in the Middle East, the infrastructure quest through the `Stans might actually change the power base and outflank the extremists and lead to Islam's own Reformation.   Who knows! We still need to continually revise what we think of China.  Those 1,375m people will be 1,400m very soon and the build of infrastructure will continue to change trade patterns. The Dongfang Modern Agricultural Holding Group IPO by Paradigm Securities also gave us a very important window into another side of China.  (The IPO raised over A$39m and so far has reached a peak of 45% gain on the IPO price.) China has so many important regions that have over 200m people individual economies that can be operating economically quite separately from each other so we should be wary of commentary from Guangzhou or Shenzhen close to Hong Kong when all the action might be in faraway Chongqing or Chengdu. So China has this combination of 50% of global consumption on one hand and then the emergence and entry of so many new intermediaries with different trading policies and procedures.  For the resources sector this really means numerous new players in the supply chains and the participation of these new traders with or without inventory.  Who is long or short on anything?  Who is a producer or user? Extremely hard to know yet. More new players are in the markets but many of the established groups elsewhere in the world are now holding back. Could this be new but inexperienced players trading in the futures markets? Following the sentiment and not the facts?  Heeding the commentators and not the markets? In my experience, all this is almost guaranteeing a return to robustly positive markets in the decade ahead. In contrast, the market place is still extremely bearish and copper hit a six year low last week but some interesting things are taking place elsewhere. Firstly here at home Australia is a major global producer of raw materials. The lower A$ has been very helpful in allowing A$ cost producers to recover and rapid changes have been made in the domestic cost structures as well.  Some stocks are holding up well and like the Gold Sector, are leading the world out of the gloom. On a bigger scale, the performance of commodities and the equities of those companies that produce and use them often give us clues to the sentiment of the market place. Oil may be bottoming because major integrated oil and gas companies' stock prices and the US E&P indices are not confirming recent lower oil prices. Oil demand is still rising at 1.5mbopd each year and US tight oil output is declining. We can look at Exxon, Conoco, Chevron, SHELL, BP and BG Group to show constructive market action and the S&P E&P (Exploration and Production) Index may be indicating its 60% fall in 18 months is overdone.   In Australia, Woodside, Beach/Drillsearch and Origin look better and Santos after its capital raising might just get by. Iron ore stocks FMG and Rio are not confirming a lower US$ iron ore price although BHP and Vale are weaker and are carrying the weight of the SAMARCO tailings dam collapse.  (We might ask what the Brazillian bureaucracy was doing about the standards they had previously laid down.) All this is against a global economy that hasn't fallen over and the US, China and India may just get stronger.  Even Japan with its stagnant economy is still cranking out steel at full capacity of 110mtpa. So the outlook is looking even more encouraging and for us in Resourcesland this graphic below is speaking volumes in clear data. Our basic livelihood of emerging resources companies (XSR) is showing another clear break in the decline of market share of All Ords turnover. The market for small resources is improving.  This is hard evidence here but the signs are everywhere. Interestingly, while the XMM and ASX200 Resources were breaking to new lows the XSR has been assisted by the XGD and has held up well. Dawes Points also knows this from recent capital raisings for small resources companies.

THE BIG PICTURE AGAIN

The major trend assessments for investment markets have to start with assessing the direction of the bond markets. It is so clear that the growth figures in the US with record sales levels in many markets sectors and declining unemployment that interest rates must rise. US Housing Starts are still well below replacement levels of 1.5m units pa and the Philadelphia Housing Stocks Index looks to want to surge soon. So the US bond market is looking very toppy with the 10 year having its peak over three years ago.  It is taking a long time to roll over but the result is inevitable.   The downward adjustment could take place at anytime now and the raising of short term interest rates may be the trigger. The world has invested almost US$90trillion in bonds. Even a tiny flow into hedges could be massive in commodity and resources stocks.

Stocks to think about

The recommended Gold stocks noted above are for Core Positions that should be held for years and not really traded. Stock  |  Price cents (AUD) More speculative plays are

I own DRM, NST,MLX, RSG, TBR, GOR, BLK, MML, TNR, TYX and PNR.  STO, BHP, DFM, BPT. Edition #43

Resources Sector Opportunities Remain

by Barry Dawes
  • Global economic expansion still on track
  • Global bond markets have now peaked
  • Banking and finance stocks down ~13% so far in June Qtr
  • Asian markets making yet more highs
  • Chinese crude steel production rate approaching record highs again
  • Forecast iron ore short-squeeze continuing
  • LME metals still tightening
  • Resources Sector improving market share within All Ords
  • Market breadth in Small Resources and Metals and Mining gaining
  • Market breadth in ASX Gold Sector improving through stock rotation
  • ASX Gold Index up 60% from low and seems to be still climbing
  • Oil price and sector may be turning up
  • Dawes Points  gold stock portfolio is up 81% since 1 Dec 14
The long term trend for resources remains firm as the demands from the real people in the world override the views of the financial sector bureaucrats and market manipulators.  The evidence is everywhere.  Especially if you are looking.  But closed minds abound in today’s world. But fear still abounds and a compliant populace in Australia has heeded the calls of the doomsayers despite the abundant evidence otherwise.  The rush to safety in bonds and cash has been strong but may now be no longer needed.  Sensing this, bond prices are now falling and bank shares are following - down almost 20% from their highs and down ~13% in the past two months.  The flow of funds is now trending from safety to something else. You should be putting your money to work in more active and productive enterprises that should give you major gains for the next decade at least. It is now worth just sitting back and think where we are as this change in bond yields takes place. The world’s new middle classes come from 1,400m people in China, 1,300m in India, 700m in ASEAN, 1,000m in Africa and 600m in Sth America. All wanting higher living standards. That means more food, technology, energy and resources. Against 360m in Nth America and 450m in Europe.  Most now wanting government handouts. Asia is growing through higher consumption and high infrastructure spending. China may be slowing in absolute growth figures but personal income is rising.  People everywhere in Asia are becoming wealthier.  Would you see these sorts of growth in personal income in the US, Europe or here? Average Annual Household Disposable Income in China from 2009 to 2018 Source: Ipsos Report - Dongfang Modern Agriculture Holding Group Prospectus China and India populations are also buying more gold and silver. So who now owns the gold and who will be making the rules? The demographics of the West are strongly influenced by the Baby Boomers who grew up in a rapidly changing world that was actually a slipstream sucking them in behind a World War II-depleted generation of cold-reality shaped stalwarts and but then the BBs also graduated into a generation of the Lyndon Johnson Great Society of publicly funded under-achievers. The initial gains were spectacular but the aging hippies and their uninspiring Generation X progeny gave us all massive government spending, Budget Deficits and the Welfare State.  And generations of reactionary bureaucrats. For us unreconstructed Baby Boomers, the 1960s and 1970s were a time of revolution in thinking after the conservatism from the Great Depression of the 1930s and the upheaval of World War II in Europe and in the Pacific.  The Depression said money was hard to come by and your savings were hard to hold on to and then WWII said that your life and personal safety, as well as savings, were hard to hold on to. Lord Keynes in the1930s with his Deficit Spending backed up by some US attention seekers announced to the world that `Government’ knew better and it could invest OPM (Other People’s Money – yours, as the Taxpayer) better than the people who earned it, i.e., you and corporations you might have invested in. The Revolutionaries of the 1960s and 70s are now the Reactionaries.  And their children too. Governments and quangos and NGOs all wanting to tell you what to do and how to do it.  Using your tax paid dollars of course.  Groupthink and consensus overruling facts and natural evidence. And calls for an inquiry on iron ore.  For heavens’ sake.  Dawes Points set out precisely in early May what was happening within the iron ore market.   The expected short cover rally is now underway.  How far will it run?  The bureaucrats are wanting to be heard now but the horse has bolted.  Yet another thought bubble. But perhaps the people overall have their own special way of responding to the uncertainty . Building up cash deposits. It is truly fascinating how people everywhere have taken to building up savings.  Inventory of Money.  Conserved labour. Private Savings. (And in contrast, Public Profligacy).   This Inventory of Money has come up often in these Dawes Points.     As does flow of funds. These funds will need to flow! Now with that flows of funds. Recall that we have gargantuan annual expenditures in USA (US$3tn), Europe (Euro 2tn) and here in Australia (~A$430bn(US$320bn) Federal Budget Expenditures) with deficits that add annually to the debt burden.  Funded by bond sales.  Government bonds now have higher yields than corporates! Dawes Points has been talking about the bond markets for some time now but I hope you have noted what has happened in the major bond markets over the past couple of months?  A volatile top and then carnage!  The bank shares are following. Just think about bond prices.  The lower the coupon the higher the volatility.  Doubling in yield.  Halving in price?  Well, not quite but horrible anyway.  And much more pain to come. Germany 10 years are now 0.88% after falling to below 0.05%!  And the UK has blasted through 2.0% after seeing 1%. This next one has to be one of the great technical graphics in my investing life!  US 10 Year Treasury Notes by price.  The peak in 2012.  The break of the break of the uptrend in 2013.  The rally in 2015 back to the trend break line for the `goodbye kiss’ then a sell off!   A break through about 122 (but probably 125!) might just put the fear of God into the `safe haven’ believers.  The falls this past month have been truly horrendous.  No wonder banks stocks are weak.  Keep watching this key indicator because it is not yet “oversold”! US$85-90tn in useless overpriced global sovereign debt.  And more coming every year.  These graphics on US, German and UK bonds should be telling YOU something LOUD and CLEAR.  Disinflation is over.  The central banks want some inflation and I just think they are going to get it. Maybe bigger than they expect. And what does Dawes Points think of rising bond yields? Good news!! All time highs in equity markets!  Almost everywhere but here in sleepy Oz.  A nation of bureaucrats chasing bank shares. Funds will be flowing out of these bonds (and bank shares) now.  Where will they go?   General equities of course, then resources shares.  Then gold and commodities.  Let’s just watch this play out. The oil price as expected has decided that low is no use to anyone and China’s 5.4% pa June Half 2015 gain means another 0.5mmbbl per day consumption.  The glut might just be over in the Dec Half and oil prices could be higher.   And while we were talking of the build up in bank deposit holdings we can also already see the build up in gold holdings.  Certainly underway in China and India. Do you go along with that rising interest rates will sink the global economy? Possibly that might happen, but the markets are telling you differently.  The US$ may have a last gasp rally and the fraudsters on COMEX may try to hit gold and commodities again but it will be futile. Recall the LME metals graphics in the last Dawes Points.  Consumption growth rates that even surprised me with their strength.  And no LME inventories.  Thank goodness we are going into Northern Hemisphere Summer otherwise the commodities would be surging already. Just come back to LME inventories.  Other stocks do exist but LME stocks are a helpful indicator. The composite is at just one week and some of the individual metals are below.  Copper, lead and tin are down to just one week and zinc is less than two and falling rapidly. Stocks of Nickel metal are at an all time high but this is disguising a major shortage developing in nickel-rich iron ores in China.   And China crude steel production is still confounding the doomsters. 838mtpa in April 2015.  Up just marginally on 2014 and the second highest rate ever!  Iron ore inventory movements will be so important to watch and will strongly influence iron ore prices.  Expect a rally to US$80 by year end. There is just so much more to come here.  I hope you all have an understanding of the significance of the Chinese Silk Road Infrastructure programme and the Asian Infrastructure Investment Bank.  No slowdown in China and acceleration in ASEAN and India. You have seen how the probable iron ore short squeeze as suggested in the last Dawes Points is materialising. It might be one of the largest volume global markets but it is still a very thin market for traders. The inventory shift highlighted there has seen China port inventories down over 25mt (~20%) to <85mt. So the basic fundamental supply/demand data is overwhelmingly positive and a commentariat environment has been created that is overwhelmingly negative. I am seeing dozens of small resources stocks attracting good volume and recovering stock prices.  The opportunities are many.  Companies with decent projects trading at a few % of their NPVs and are just awaiting funding.  Producing companies trading a low single digit PERs.  Explorers with some outstanding results.  Technical geological and geophysical evidence is building up for the most extraordinary decade of new major discoveries in Australia in oil and gas, copper, lead-zinc-silver and gold. The indefatigable Kerry Stevenson and her recent Symposium at Broken Hill has just delivered a focussed insight into the massive potential for new discoveries in central Australia.  Knowledge and technology that begets new knowledge and then great wealth.   The mining and exploration sectors provide some of Australia’s most dynamic Intellectual Property. Hats off to the staff from the universities and Geological Surveys of NSW, Sth Australia and the Northern Territory.  The base that is being laid out before us is truly exhilarating.  Australian exploration will be having a vintage decade. I hope I have the time to cover this in more detail in the next few months because the implications are vast. So here is your chance to do very well on most resources companies. I know dozens of these companies with outstanding operations and projects and there are scores more that I don’t.  Many are already up 100s of % in 2015. Most are too small to even fit within the ASX 300 sub indices but I am seeing improving volumes, increasing market breadth and the rising prices that go with them. Participation by a broader section of the market place is still not with us, reflecting the fear and pessimism but this has been a very long period of bear market so it will take time to bring this back to normal.  That means this bull market will last a very long time too! Call me if you want to make some real money in the year ahead! But now however, the evidence can be best seen in the actual performance of ASX the Small Resources and Gold Sector Indices. Market share of ASX turnover is picking up and the four year-long downtrend declines have been broken.  The momentum is now with the Resources Sector. Have a close look at these graphics and I haven’t done them because they look colourful. Each one suggests major changes are coming in the markets. There is a downtrend trend break for the Metals and Mining. Small Resources had its bottom in June 2013 which is my `low’ for this cycle and many stocks outside the XSR have done very well indeed. The XGD is showing leadership after bottoming in November 2014. Gold sector turnover is rising as breadth and participation increases. Appreciate that the ASX Gold index is still down 70 % from its high and is now turning up. Certainly the weakness of the A$ in late 2014 helped kick the market and some people might have thought it was just an A$ gold adjustment that would soon peter out.  Nice jump.  Take profits.  Now what? Well it has held its ground and then moved marginally higher. In my view, the XGD is readying itself for another major move up.  Perhaps mirroring the bond markets that seem to be expecting an even bigger thump to come there.  Timing suggests mid to late June so you may not have much more time to dilly dally. This looks very interesting and a break above 2800 could see a sharp rush to 4400 (up 64% from here). Will we get it? Looking at this index more closely there is much to like. It is showing intra sector rotation as some stocks have weakened, some have moved sideways and some others have surged. Dawes Points has its favourites.  NST, MLX, TBR, BLK, SBM, OGC, NCM, EVN, BDR, MML, GOR, DRM and CGN.  

The Paradigm 1 December 2014 Portfolio to 3 June 2015

      A cents    
  Stock ASX Code

1-Dec

3-Jun

Change

1

Beadell BDR

19.0

19.8

3.9%

2

Doray DRM

27.0

44.0

63.0%

3

Evolution EVN

43.0

114.0

165.1%

4

Kingsgate KCN

62.0

75.0

21.0%

5

Medusa MML

57.0

92.5

62.3%

6

Newcrest NCM

918.0

1381.0

50.4%

7

Northern Star NST

96.0

237.0

146.9%

8

Oceana OGC

96.0

313.0

226.0%

9

Regis RRL

207.0

119.0

-42.5%

10

Resolute RSG

129.0

31.5

-75.6%

11

Saracen SAR

21.0

48.5

131.0%

12

Tribune TBR

265.0

390.0

47.2%

13

Gold Road GOR

20.5

45.5

122.0%

14

ABM Mining ABU

22.0

26.0

18.2%

15

MetalsEx MLX

70.0

145.5

107.9%

16

Blackham BLK

6.7

18.0

168.7%

17

Crater Gold CGN

12.5

11.0

-12.0%

  ASX 300 Gold XGD

1701

2625.0

54.3%

This unweighted portfolio is up 69% from 1 December with 0.5% yield.  The weighted (big caps double, mid caps single and small caps half weighting) portfolio was 80% higher and had dividends from NST, OGC, MLX and EVN to take it to just over 81%. What did yours do? The XGD was up 54% before dividends. Look at the leaders.  NST had a very strong run but is now digesting that.  NCM had recently made new rally highs.  MLX has exploded higher.  SBM is catching up.  Market breadth is expanding.  New rally highs for many.  Do you understand the TBR story?  BLK, GOR, CGN.  Like them all! Were you aware that the term Hedge Fund came from the big bond funds that `hedged’ their bond portfolios against rising inflation in the 1960s by having a portion of their funds in investment vehicles that bought gold and commodity stocks? With the S$80-90tn now in bonds those fund managers have a lot of hedging to do! What would a 1% hedging premium (US$800bn) buy in the gold and resources sector?      What would 2% buy? Do you have enough gold and resources stocks? Look at this: XGD Gold stocks against A$ gold had fallen 80% from April 2011 to the Nov 2014 low!  A$ gold at the low was the same as at peak in April 2011!! Other sectors are moving up and the takeover of Sirius by Independence Group along with the consolidation in the gold sector should be giving everyone confidence. And I do like the oil and gas sector.  Oil is holding up well with strong demand from Asia and the US output is stabilising or falling. The thesis in Dawes Points hasn’t changed these past two years even though some things have gone terribly wrong in the A$, the iron ore price, the oil price  and…… oh yes, resources stocks themselves. But the rest of the scenario of:-
  • Global bonds peaking
  • Global equity markets surging
  • China hasn’t fallen over despite Wall Street’s best efforts to say otherwise
  • Gold price firm in US$ and rising elsewhere in other currencies
  • Metals consumption growth rock steady
  • Most metals in supply deficits
  • LME inventories very low
  • Resources sector earnings still attractive
  • Exploration successes still flowing through
is still spot on. I am winning now. Are you there with me to win as well? I own NST, MLX, CGN, BLK, SBM, GOR, TBR, DRM and more. 6 June 2015 Edition #37

Gold Index up 60% since November – Are you on board the new Gold Bull Market?

by Barry Dawes

Key Points

  • Gold price now surging – up 15% from US$1130 low
  • Gold stocks jumping - ASX Gold Index 61% from Nov 2014 low
  • Rising dividend streams now apparent
  • 23 ASX stocks Gold sector universe FY16 PER of 4.0X and high yields
  • Did you get on board?
  • Long term gold bull market Stage II still only in infancy
  • Industry costs tumble for energy, labour and equipment
  • Opportunity in Blackham Resources (BLK.ASX) for eligible investors (see at end of note)
Further rises in US$ gold prices have given strong support for gold mining shares and these are now acting to reassert reasonable valuations after >3 years of savage underperformance against gold and general equities. A pullback is possible after such as strong rise but these stocks are so underowned that pullbacks in this bottoming and upturn process should be shallow and short-lived. The December Qtly and Half Yearly Reports are now coming through so more output and earnings surprises should be expected. This rise in US$ gold is extremely important and when put in the perspective of the BIG PICTURE so much is now becoming clear.  Gold in many currencies is now surging.  I strongly consider a US$ gold price of $5,000 is achievable in the coming cycle. First of all, do you have enough gold and gold mining shares?  A gold holding is ESSENTIAL for everyone and quality dividend paying gold stocks should be there beside your Telstra shares. If you don’t hold gold or these gold shares contact me NOW!  bdawes@psec.com.au The Australian Gold Sector over the past two years has been forced to adjust to very difficult conditions after the sharp escalation in costs for capital, equipment, labour and energy and it has recovered so very well since mid 2013.  The benefits were already being shown in 2014 but low gold prices deflected the gains.  So now the Dec 2014 Quarterlies to date are showing some excellent cost reductions and with a A$1600/oz gold price the operating margins are often over A$500/oz (for a 100,000ozpa producer this is A$50m pretax and A$35m after tax.) and PERs are low single digits for many. The Australian Gold Industry has also completed  most of its capex for the last cycle and much of its debt has been repaid. Now, A$ gold prices in the past two months have averaged about A$100/oz (~8%) higher than for the whole 2014 year average of around A$1400/oz. With capex completed and banks being repaid it is now the time for shareholders. Everyone needs to keep in mind that resources stocks in steady times (have there ever been steady times?) traditionally paid 50-65% of earnings as dividends.  This is what should happen now. And if gold prices continue to rise as I expect over the next few years then the dividends should only grow.

Strong market performance

The ASX Gold Index is now up 61% since the November 2014 low at 1642.  A strong move that I have suggested could occur and that if it came it could be violent.  Violent, yes.  Many large stocks have had +10% daily jumps.  Look what has happened in the ASX Gold Index since then.
Week Ending

Weekly Close

Weekly Change %

Cumulative % gain

7-Nov-14

1642*

14-Nov-14

1746

6.4

6.4

21-Nov-14

1852

6.1

12.8

28-Nov-14

1922

3.8

17.1

5-Dec-14

1913

-0.5

16.5

12-Dec-14

1968

2.9

19.8

19-Dec-14

1972

0.2

20.1

26-Dec-14

1932

-2.0

17.7

2-Jan-15

2069

7.1

26.0

9-Jan-15

2315

11.9

41.0

16-Jan-15

2504

8.1

52.5

23-Jan-15

2643

5.5

61.0

* XGD low But this index is still 70% BELOW the 2011 high which occurred at about A$1403/oz and the current price is A$1630.  Something is not adding up so the solution is gold stock prices at levels above the 2011 high again in the next few years.  Or sooner. Have a look at the performance of the 17 chosen stocks from 1 December 2014.  And look at my targets from 7 January 2015. Please note these are initial targets for end 2015 but many should be exceeded well before.

Stock

Price 1 Dec

Price 23 Jan

Change

Target

Potential

1

BDR

19

38

100%

40

5%

2

DRM

27

59

119%

110

86%

3

EVN

43

94

119%

180

91%

4

KCN

62

79

27%

180

128%

5

MML

57

90

58%

250

178%

6

NCM

918

1362

48%

2000

47%

7

NST

96

214

123%

450

110%

8

OGC

207

260

26%

600

131%

9

RRL

129

204

58%

450

121%

10

RSG

23

42

83%

60

43%

11

SAR

21

40.5

93%

90

122%

12

TBR

265

330

25%

450

36%

13

GOR

20.5

39

90%

200

413%

14

CGN

12.5

11.5

-8%

50

335%

15

ABU

22

33

50%

60

82%

16

MLX

70

106

51%

180

70%

17

BLK

6.7

10

49%

25

150%

Has the market run too far too quickly?  Possibly.  A 60% move certainly needs some correction but consider that the market place is extremely underweight gold and gold shares so the run may be longer than expected and the pull back may come later.  Who knows? A 60% rise after a 80% fall to a very low base ( ie to the levels of 2002) is not a big move when you consider we are still 70% below the 2011 high. Looking at a collection of many companies shows some very attractive sector investment arithmetic. How is a sector average of 4.0xFY16 EPS with an average yield of 10.0% at the current A$1630/oz? That is the average so some PERs are actually very low indeed. The matrix below gives a fair view of 23 mostly producing stocks that I follow. I cannot over emphasise that there are dozens more out there but you can’t follow them all and many are too early.  However, this is a very long term bull market now and there will be time for them to catch up. The first item to focus on is annual gold production.  Then look at market cap.  Note the revenue.  Note the Revenue/Market Cap.  This is your key to leverage.  The higher the better.  If a stock has revenue equal to market cap and has average A$1100 AISC costs (All In Sustainable Costs) it will have a 30% operating margin.  Price to Operating Cash Flow ratio of 3.5x. My model takes the current A$ gold price, annual production, AISC costs, total pre tax costs and applies a 30% tax rate to give EPS and generate the PER.  A dividend of 50% is assumed unless a company has otherwise stated. Many companies have some forward sales but these are generally small and are unlikely to statistically change the received annual price averages. This universe has A$7bn revenue from 4.5moz in FY16 and a market cap of A$7.5bn. Earnings could be A$1.6bn after tax. Are these attractive enough for you now at A$1630? PER 4.0x FY16  and 4.1x FY17 this universe? And yields of 10.0% and 15.0%. And at a range of higher prices?
Gold Price PER FY16 PER FY17 Yld% FY16 Yld%FY17

A$1200

18.1

57.1

3.5

2.1

A$1300

10.8

14.2

5.0

5.1

A$1400

2.9

5.1

6.5

8.1

A$1600

4.1

4.3

9.6

14.2

A$1700

3.3

3.4

11.1

17.2

A$1800

2.8

2.8

12.6

20.2

A$1900

2.4

2.4

14.1

23.2

These figures are very attractive but these next few figures put them in perspective. The ASX Gold Index fell 80% from the April 2011 high at 8499 to the low in November 2014 at 1642. It is still 71% below that high.  Cheap here. And gold stocks have fallen against the A$ gold price.  About 73% from the April 2011 highs and 78% from the 2008 relative value.    Very cheap here. And with XGD market share so low at about 1.5% of ASX All Ordinaries turnover (it was down to just 1% in August 2014!) compared with 4.5% in 2011-12 and over 6% in 2010, NO-ONE owns these stocks.  A downtrend break has occurred. Huge pent up demand coming here.  Remember the A$1,660bn in bank deposits. And just remember the ASX Gold Index history. Well, did you get aboard?  And do you have in your portfolio these producing stocks that will be big dividend payers in 2015 and beyond now that most sector capex is complete and debts are being paid down? If not, contact me.  bdawes@psec.com.au Here is another perspective from Avi Gulbert, an Elliot Wave aficionado, who thinks we might get another sell off to new lows before his BIG PICTURE comes into play. He is open to the turn having occurred already but his interpretations are useful. The concept of the `irregular B wave’ for the rally into 2011 for gold and gold shares gives a powerful underlying force that reflects all the previously raised concerns about public sector debt and the debasement of currencies.  This wave model projects the US HUI (Gold Bugs Unhedged Index) out to a level 20 times higher by the mid 2030s.   You might need to enlarge this diagram to see the targets. https://www.elliottwavetrader.net/images/charts/full-dshel4r7qDCriXl8CP5xP.png Those large dividend blue chip gold companies should be making shareholders very wealthy over a very long time.  Have you enough gold and gold shares? I am going to come back to this concept in another Dawes Points very soon.  The implications are extraordinary.

Gold Outlook

Rising gold and rising gold stocks are a welcome and long overdue experience. Nice to be making money again. But why is gold now rising? The price history of US$ Gold since 2000 shows a long term uptrend with a 38 month decline. The 10 year bull market was saying something and something big was afoot.  Many reasons.   Currency, debt, inflation, wars and deficits.  All contributed.  Many more reasons out there too. For me, the build up in public sector debts and the gyrations in currencies are my preferred reasons. Who can really trust politicians or their government bureaucracies and their welfare recipient supporters to protect a currency and the population’s wealth? But then we had the extension of the 30 –year rally in the US T-Bond market that brought yields down even lower and bond prices into the sky.   And a US$ that rallied hard. Do keep in mind that the US$ Index is made up as follows:- Not a good index because weightings make it Euro dominant and the US$ has fallen against the Swiss franc and also the Indian rupee and the Chinese Yuan is not included.  Nor the A$.

I don't buy the US$ strength argument but then I have not got it right on either the US$ or the Tbonds. Gold in Yen, Euros, Pounds and A$ has broken 3 year downtrends and is heading up sharply.

These suggest the rally is real and, even with some technical pull back, gold in these currencies will be heading higher. This `market breadth’ says buyers everywhere are buying gold not just arbitraging currencies. The big buyers throughout 2014 have been India, China and, surprisingly, Turkey. Here we have gold in Indian rupees, Chinese yuan and Russian roubles. http://www.24hgold.com/graphiques/picturedata.aspx?graphParam=Gold%2bUSD-INR%2boz%2byy%2b1&format=172 Source:24hGold.com Demand from China has continued to explode with recent figures indicating 70 tonnes of gold withdrawn (i.e., acquired by Chinese citizens) from the Shanghai Gold Exchange in Week 2 of 2015 and have brought the year to date figures to 131 tonnes ahead of the Chinese 2015 Spring Festival starting on 19 February. Source: Koos Jansen Bullionstar This is 3400 tonnes annualised from China alone and EXCEEDS annual global gold mine production of 3100 tonnes! The numbers from India are reported to be even more after the new Modi government made major changes to import restrictions.  More market liberalisation could take place and further increase demand for gold from India. Note that the Shanghai and Mumbai equity markets have been on a strong tear in the Dec Half of 2014.  Shareholder wealth has increased and demand for jewellery has been boosted. I have adjusted my Supply/Demand graphic to show this increased demand from China and India. Demand for gold from Europe in recent months has also increased sharply to reflect fears of Islamic State terrorism, QE threats by the European Central Bank and the continuing general European malaise. I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections. I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections. The `Deficit’ may also in fact be exacerbated by a decline in the 1400t annual availability of scrap.  The GFMS numbers indicate that high prices in 2008-2012 drew out an extra 3000 tonnes of scrap gold.  Aunt Audrey probably doesn’t have any scrap jewellery left now. Where will the gold come from? These numbers do show that there is a real game in play for physical gold and the market manipulators in gold futures markets do not have much more time to cover before the final whistle is blown.  If large short positions do in fact exist it will be very difficult to buy back any such gold. The playground is also being tested by the emergence of the new gold exchanges in Dubai (for Indian demand), Shanghai and Singapore.  New gold only contracts are now being used so unless traders have the gold, they can’t sell.  In addition a new 24 hour COMEX 1 kilo physically-delivered contract is planned to accommodate Asian buyers who will now be able to have a real pricing presence in the US time zone with physical delivery in Hong Kong.  It will be interesting to see if the gold price manipulators try to attack the futures market while the physical market stays aloof.  No gold to sell, no play. The retreat by Switzerland from its peg to the Euro has added another dimension to the declining trust in central banks and fiat currencies.   I understand it has been an important game changing event in Europe. The demand for gold keeps rising, the supply is inflexible and so the gold price must rise. A major turning point was probably seen in the Dec Qtr of 2014 and the outlook for gold is very strong. Account Opening forms for Paradigm Securities are available to download here. Barry Dawes 27 January 2015 I own TBR, BLK, DRM, GOR, NST, CGN, MLX, ABU, KCN  

Blackham Resources Placement stock offer to eligible investors

Blackham Resources (BLK.ASX) is in Trading Halt to raise A$2.5m through the issue of 27.8m shares@ A$0.09 (close A$0.098 on 23 Jan). BLK has 4.4moz at its Wiluna Project and is seeking equity and debt funding to reopen the Wiluna Plant using nearby off site ores from the Matilda Project and from newly recognised high grade quartz reefs.   A full year production would produce over 80,000ozpa at <A$1000/oz ASIC. Contact me if you are interested  bdawes@psec.com.au BLK Term Sheet Download | BLK Jan 2015 Presentation Download  

Dawes Points Where are we now

by Alison Sammes

Where are we now?

Key Points

  • US equity markets hit new all time highs
  • Asian markets surge
  • Economic data showing robust growth in many countries
  • Global cash levels still very high
  • Commodity prices may be readying for a surge in 2015
  • Chinese steel production still over 820mtpa and 820mt YTD (+5.3%)
  • Iron ore imports into China up 15% YTD and likely to exceed 900mt
  • US$ still strong for now
  • Japanese yen breaking down
  • Global bonds have spike high then sell-off
  • Gold price hammered into an important low?
  • All these indicators say BUY RESOURCES  STOCKS!!
Interesting and volatile times we live in!  As hoped, the recent stock market decline wasn't one to be concerned about after all and now we have all time highs in the US and market surges in most places from India to Shanghai, Tokyo and even Australia.  What are these markets telling us about where we are now?  The thought of the global economic boom is still there in my mind and these actions give me more confidence that the likelihood is increasing. Don't laugh.  Look at the data. Dawes Points has continually emphasised that the markets are telling us that the outlook is far better than the commentariat would have you believe and the markets last week certainly gave some evidence that more is to come.  The Dow Theorists, mostly bears, now have to turn bullish because all three Dow Indices (Industrials, Transports and Utilities) are at all time highs and have confirmed the next leg of the Bull Market is underway.  Many other bears will be forced to change their stances. The 4.8% jump by the Nikkei, and >1% by Mumbai, Shanghai, Singapore, Hong Kong on Friday followed the lead from the US and are likely to be firmer again this week to reflect Friday's US action.  Shanghai is up 21% since June and India is up 21% since May in the latest stage of these moves. The US economic growth numbers of +3.5% for the Sept Qtr are part of a line of results that have given 4 of the past 5 qtrs at above 3.5% (5qtr ave 2.8%pa) and a general uptrend for the past two years and certainly don't suggest the end of the world. United States GDP Growth Rate Corporate earnings for many companies in the US have been good and FactSheet reports for Sept Qtr 2014 that, for the 362 companies it follows, 78% have had earnings above the mean estimate and 59% had sales above the mean estimate. EPS figures for these companies are 7.3% higher than a year ago and about 28% higher than in 2007 pre GFC. The good US economic growth data have been above expectations and many other countries are also providing this better data. More recent data and IMF forecasts* for 2015 paint a positive picture although much of the recent data in UK and Europe are better than IMF forecasts* and its very recent outlook downgrades.
% GDP growth

2014

2015*

US

3.2

3.1

Japan

0.9

0.8

UK

3.2

2.7

Germany

1.4

1.5

China

7.4

7.1

Taiwan

3.9

4.0

India

5.6

6.4

In contrast to the strength of so many markets and all these positive economic and business data it seems the world still is in love with defensive positions in cash and fixed income.  Australia has A$1,640bn in bank deposits and recent discussions in SE Asia and China suggest investors and businesses currently have 35-50% of investable assets in cash. A survey by UK firm Hogan Lovells has an interactive website that uses Bloomberg data to give corporate cash balances for the top 1000 global corporations. Data for August 2013 was US$5,623 billion, up 39% from US$4,044 billion in August 2012. Look at these numbers in US$bn and what they might be now.
Region August 2012 August 2013

+%

Now??

Nth America      1,850      2,462

33%

3,000??

Asia Pacific      1,100      1,790

63%

2,000??

Europe         837      1,033

23%

1,100??

UK         147         186

27%

200??

Latin America           71           97

37%

110??

Other           39           55

41%

60??

Total      4,044      5,623

39%

6,470???

It seems highly likely to me that the rising stock markets and quite reasonable economic growth figures will be giving a great boost to confidence in the corporate sector and this should be flowing into the consumer and SME sectors.  And the first change will be for new orders for inventory to meet anticipated or received increased demand. These large cash inventories should be very important in determining economic activity everywhere over the next few years This issue of inventory really fascinates me. In the resources sector we are all familiar with the inventory data for metals on LME, COMEX and Shanghai Metals Exchange and export and import port stockpiles.  We all currently expect mine stocks to be minimal and sometimes data is available for smelter and steel mill raw and finished inventory. But inventory in the hands of users/developers/intermediaries/resellers can be difficult to ascertain.  And all these people see the same papers, TV, blogs, trade journals and watch the daily markets as we do.  Fear affects everyone's mood. Dow down 250 points means everyone buying a little less this week to ensure cashflows are OK. It has always been clear from previous cycles that when a recovery takes hold and business and consumer confidence picks up then demand exceeds consumption as downstream inventories are rebuilt. If copper is used as an example, the International Copper Study Group is forecasting copper consumption in 2014 to grow 4.4% from 20,525 ktonnes to 21,429kt, being about 900kt.  Refined copper production is expected to rise by about 1,100kt so that a net surplus of about 200kt is expected in 2014 on top of a surplus of 400kt in 2013. At current consumption rates the world uses almost 60kt per day. 410kt per week. Current LME copper inventories are just 160kt whilst COMEX is 30kt.  Total identifiable inventories are about 1,100kt. Should the processing stream decide to increase copper inventories by three days or 180kt then the demand for metal would rise not by 4.4% in 2014 but by 5.4% and the current LME and COMEX inventory would be absorbed. The mountains of corporate cash could easily find the US$1.2bn to fund this increase. Recent reports have suggested UK hedge fund Red Kite has already acquired more than 50% of these LME copper inventories. This extra demand can often remove a sizeable chunk of LME inventory and change the market balance for the year ahead. Note that LME inventories for copper, aluminium, zinc and tin have been declining in 2014 and have to be considered to be tight.
000t

1-Jan-13

1-Jul-13

1-Jan-14

1-Jul-14

current

Jul-13

Jul-14

Copper

320

665

366

155

162

-75.6%

4.8%

Zinc

1220

1061

933

668

698

-34.2%

4.5%

Lead

320

198

214

194

227

14.4%

16.9%

Tin

12

14

10

11

10

-25.8%

-8.8%

Nickel

139

187

262

305

385

106.0%

26.4%

Aluminium

5210

5435

5458

5046

4429

-18.5%

-12.2%

Price would then be set by willing buyers and sellers and not unwilling buyers and desperate sellers. Many of these commodities could benefit. Speaking of inventory, it certainly seems that investors holdings in resource stocks are very low and will need to be increased!

Commodity outlook encouraging

Commodities have been weak recently with iron ore, oil and gold as good examples. But it is notable that many commodities and other markets (especially the A$) have had declines but are bouncing off on a long term support line.  Many agricultural commodities have had typical selling exhaustion patterns (as if from liquidation of long positions) and fit along these support lines. Should these commodities bounce then the uptrend can be quickly re-instated. Much has been made of the influence of a strong US$ but individual supply demand patterns are more important than just a currency adjustment. Oil and natural gas need to be closely followed because a strong US$ won't have much of an impact on these prices.The Islamic militants in Iraq may affect oil and gas fields and also may try to intercept tankers in the major choke points such as Straits of Hormuz to give some supply problems for the West.  Also US natural gas inventories are relatively low ahead of what could be another cold winter.

Steel in China

Consumption of steel is forecast by the China Metallurgical Industry Planning and Research Institute in Beijing (Sept 2014) to peak in 2017 at 763mt and decline to about 696mt by 2025. China Crude Steel Production was 779mt in 2013 and should be 820-830mt in 2014 and 850mt in 2015.  It should peak in the mid-term of 13th Five-year Plan Period (2016-2020) in 2017 at approximately 870mt before declining to 850mt by 2020 and 800mt by 2025.  Note that RIO and BHP have a longer term growth rate that takes crude steel production above 1,000mtpa. The most recent World Steel Association data gives 821mtpa for September for China but this should slow seasonally ahead of the 2015 Spring Festival to give the 820-830mt for 2014. To achieve this crude steel production rate, iron ore imports have been surging and are up about 15% YTD and have exceeded 1,000mtpa on a monthly basis.  The full year should be about 10% higher than in 2013. Domestic magnetite concentrate production should decline by as much as 140mtpa by 2018 such that total imports should exceed 1,150mtpa basis 62%Fe and with lower grade iron ores around 58% Fe this figure should exceed 1,200mtpa. Source: China Metallurgical Industry Planning and Research Institute I continue to be amazed at the incessant calls for crude steel production in China to decline sharply and to hear that demand for raw materials into China is slowing.  15%pa growth in 2014 after 10% in import growth in 2013 is a decline? Nevertheless, the iron ore price has slipped below US$80/t causing hardship for high cost producers, especially those in China.  This graphic suggests about 85% of China magnetite concentrate production is losing cash.  Perhaps 30% is losing over US$40/t. The steel mills do not appear to have yet rebuilt depleted inventories and port inventories are now declining and are at a 7 month low.  Some of the ore accumulated for low cost financing and placed on these port stockpiles may have now been already sold off and might reduce the additional pressure on the market. The major producers from BHP, RIO, FMG to Vale have been aggressively producing and selling ore to hurt the Chinese producers and to place pressure on potential new entrants.  What is really interesting is the indications that iron ore production costs are coming down rapidly for these big players and should all be below US$60/t CFR basis 62%Fe. US$80 should be an important level but Chinese steel mills inventory actions will have the final say by the end of the year.

US$ strength

The rise in the US$ against most currencies has been seen to be the main driver behind the decline in commodity prices and that the market place sees a strong US$ as deflationary. This is all very nice but look at these numbers.  The CRB Index (basis CCI – graphic above) has been declining in US$ since highs in March Qtr 2011 but despite the strong US$ it is actually up for most currencies in 2014! CRB Index rebased to 100 for 2011 highs in each currency, with Dec 31 and current figures.
  2011 High

2011

2012

2013

2014

From high

2014

US$

100

82

80

74

70

-30.0%

-5.1%

Euro

100

88

85

75

78

-21.8%

4.5%

Yen

100

74

82

91

93

-7.2%

1.7%

SF

100

82

79

71

72

-27.6%

2.7%

A$

100

81

78

84

81

-19.5%

-3.6%

This graph of the CRB Index in Euros says something more.  This is likely to break upwards as global demand improves.  Copper has been rising gently in Euros since the March Qtr. While the US$ has been strong the Yen has not and the Yen makes up 13.6% of the USDX.   The Euro makes up 57.6% of this US$ Index and a close look at the cross rates doesn't suggest the US$ is going a lot further from here although it might not fall back much for a while.  The Yen is certainly going to be weaker but probably not many other currencies will. A weaker Yen is also obvious from this graphic says the A$ should be very strong against the Yen. Outflows of capital from Japan must be expected.  The gold price in Yen is also looking quite strong.

US T Bonds  - Surge then selloff

The remarkable surge in bond prices in mid October seemed to be a last gasp run and the decline since then still makes these bonds very vulnerable as global economic growth improves and deflationary risks recede. These bonds will also provide much of the capital that will join with cash to move into equities and commodities. The parallel of US TBonds with the US$ still needs to be considered. The US$ must follow its bond prices.

Gold price hammered into an important low?

Gold and gold stocks have been a hard road to follow but I think the fundamental arguments for a strong gold price and much higher gold shares remain. Governments destroy currencies by spending too much and racking up debts.   People who have lived through violent currency depreciation know the value of gold and the two biggest populations in India and China are showing this by buying as much gold as they can get their hands on.  Central banks are buying gold again.  Demand is stronger than mine and scrap supply so it can only be banks and hedge funds selling volume. How much do they have left? The evidence is clear that this uptrend has been broken.  A fair technical target could be US$700/oz if you wanted to be bearish. But this is also valid technical support with yet another market having three bounces along the support line. And this graphic is back to crisis levels.  Back below 2008 lows and back to 1986 levels.  Extreme long term support here for the US Gold Index! And to clutch at some other straws the sell off in the GDX ETF has been on massive volume and back to this pervasive and remarkable three point downtrend support line that we see  in so many markets this year. And when we look at gold shares against gold it suggests that this is the final selling and capitulation stage - or else gold is going to US$700 and most of the gold industry will close. This just screams that we must be near the end of the 42 month decline in gold shares. I particularly like NST, MML and DRM here as low cost producers and GOR, ABU, KGD, BLK and CGN as developers. Paradigm has opened an account with a bullion dealer which allows clients to invest directly into gold with delivery or to be held in storage.  Talk to me about it if you are interested. Stocks to BUY The major resources stocks BHP, RIO, FMG, WPL, STO, OSH are attractive opportunities and so many of the juniors are so cheap and very good value where currently funded. The Dawes Points Outlook is for this market to run for many years to the upside so there will be many opportunities coming through. For those seeking a general exposure to non resources stocks I can recommend the new A$50m IPO of CBG Capital LIC with a manager whose two funds have outperformed the ASX 200 reliably over the past 8 and 12 years respectively. Good growth and a fully franked dividend yield of 5-6%pa.   The minimum of A$16m has already been reached and the offer has a closing date of 20 November. A flyer on this will be circulated this week, but please call me on +612-9222-9111 if you'd like to discuss this. 5 November 2014