Global Gold ETFs: Biggest Outflows In Three Months

An opportunity to buy or a danger sign? ETF Securities reports that global gold exchange-traded products such as the SPDR Gold Trust (GLD) suffered their largest outflows in three months last week. As that was happening, net speculative long positions in the futures market fell near April 2009 lows.

With gold futures down 1.7% to $1657 an ounce recently, the market is a-chatter about the strong dollar and the outlook for interest rates, though an Indian jeweller strike and weak data from China have also played roles. Traders are taking little consolation from Goldman Sachs’(GS) bullish view this morning, which repeated the bank’s call for gold to reach $1,840 in six months and $1,940 in a year.

Like Goldman, ETF Securities seems confident that the metal will keep its pace:

ƒ Global gold ETPs see largest outflows in 3 months as gold price fall shakes out short-term investors. Sustained gold price weakness and a pull-back in broader risk positions caused ETP investors to pare back gold holdings last week. Total global outflows amounted to around 0.7mn ounces or around $1.1bn at the current gold price. This compares to total gold inflows of around 1.7mn ounces ($2.9bn at current gold price) up until the previous week. The gold ETP selling coincides with a further large-scale clearing of speculative futures market positions, with the latest CFTC data (data to March 20) showing that net speculative longs in the futures market have dropped back down towards April 2009 lows (see positioning charts on page 4). The gold price decline and investor selling has been sparked by upward revisions to the US rate outlook (and related US dollar strength) as US economic growth has continued to improve. It appears that shorter-term investors, recognizing the near-term headwinds to further gold price gains resulting from current improving US growth prospects, are trimming positions. However, with real interest rates expected to remain structurally low in most reserve currency countries, sovereign debt and financial system risks still high and structural demand from emerging markets and central banks still in their early stages, it is unlikely the recent price declines will shake out longer-term gold ETP investors. With net long speculative positions now near April 2009 lows, a firmer base has been set for future long-term price gains.

Some key points from the Goldman report:

Gold prices remain too low relative to the current level of real ratesUnder our gold framework, US real interest rates are the primary driver of US$-denominated gold prices. However, after being remarkably strong in the first half of 2011, this relationship broke down last fall, with gold prices falling sharply in the face of declining US real rates, as tracked by 10-year TIPS yields. While gold prices have returned to trading with a strong inverse correlation to US real rates since late December, at sub-$1,700/toz they remain below the level implied by the current 10-year TIPS yields. The gold market’s expectation that real rates would be rising along with economic growth may help explain this valuation gap We believe that despite last fall’s decline in 10-year TIPS yields, the gold market may have been expecting that real rates would soon be rising along with better economic growth, leading to a sharp decline in net speculative length in gold futures. Accordingly, a simple benchmarking of real rates to US consensus growth expectations suggested a level of +40 bp by year end. Our models suggest this higher level of real rates would be consistent with the current trading range of gold prices. As we look forward, our US economists expect subdued growth and further easing by the Fed in 2012, which should push the market’s expectations of real rates back down near 0 bp and gold prices back to our 6-mo forecast of $1,840/toz.Subdued US growth in 2012 will likely support gold prices, although risks to our constructive view are rising We reiterate our constructive outlook for gold prices in 2012 and our 3, 6-and 12-mo forecasts of $1,785/toz, $1,840/toz and $1,940/toz, respectively. We acknowledge, however, that continued strong US economic data poses growing risk to our forecast for rising gold prices. Net, we reiterate our view that at current price levels gold remains a compelling trade but not a long-term investment, and we continue to recommend a long position in Dec-12 COMEX gold futures.

Chinese Copper demand will disappoint: Barclays

The current state of Chinese demand is varied across industries. The spot demand for copper in China is weak, the improvement in Q2 may be tepid and imports are likely to remain strong in March and possibly April before trailing off until later in the year.

Sentiment amongst Chinese fabricators and manufacturers is negative. Orders have been slow to improve following the Chinese New Year and in some sectors are below year-ago levels. Inventories of cathode at consumers are low, but inventories of finished product are higher than usual for the time of year.

Fabricators and some manufacturers increased production strongly in January-March in expectation of a pick up in demand during the seasonally stronger Q2. But, so far, demand has been softer than they expected. Bonded warehouse stocks of copper have continued to increase. Current copper bonded warehouse stocks is estimated to be around 600Kt, in line with the 2011 peak.

March and April copper imports could be stronger than the market expects. The metal that had been booked in October/November 2011, when the arb on six-month forward prices was open, will continue to flow into the country. It is also likely that we might see a pick up in exports. Chinese smelters have been delivering metal into bonded warehouses from which traders have been exporting metal onto the LME, attracted by the backwardation.

Overall, the Chinese demand in the short term is likely to disappoint before beginning on a recovery trajectory later in Q2. Subsequently, imports may weaken until bonded stocks are run down to more normal levels, possibly in Q3 12. With the market already expecting a drop in Chinese imports, it is doubtful that this alone would have a significant negative impact on LME prices.

That’s more likely to be determined by the market’s evaluation of how long imports will weaken for and whether it's the result of short-term dislocation or longer lasting core weakness. The LME backwardation meanwhile is likely to continue unless Chinese exports are big enough to begin offsetting the draws in LME inventories.

Source: Barclays Commodities Research report

India gold imports to fall 53% in 2012: Bombay Bullion Association

Indian gold imports is set to crash by over 50% in 2012 owing to high prices and increasing taxes imposed by the government, as per the Bombay Bullion Association (BBA). India is the world's biggest gold market and such a big fall in imports could effectively dethrone the country from being the leading gold importer in the world.

In a Reuters Survey, Prithviraj Kothari, President of the BBA estimated that 2012 gold imports could fall down to 450 tonnes, down 53% compared to 969 tonnes imported in 2011. “Last year we had good imports but looking at the pace of the fall so far we are heading for a big fall in 2012"

Meanwhile Q1, 2012 gold imports are seen down 56% at 125 tonnes due to Jeweller's strike and a slow season. "It is March, which is a lean period for jewellery business. Moreover the loss in sales incurred during the 10 days of ongoing strike by jewellers will hit imports. It is likely to be less than 125 tonnes in the January-March period,", The Press Trust of India (PTI) quotes Kothari. Q1, 2011 imports were at 283 tonnes.

The Indian government had raised the import duty on gold while also doubling the customs duty. This was seen as a move to control the influx of huge quantities of gold that has been putting a strain on India's fiscal deficit. Coupled with the current higher prices of gold, many analysts are predicting Indian demand to fall drastically.

And with the crashing Indian demand, China could overtake India to become the biggest gold market in 2012.

High Oil prices strain Gold mining companies, keeps stocks undervalued against Gold

High oil prices are squeezing the profits of oil companies who are already battling the headaches of high labour cost and higher taxes. And with gold prices stabilizing at the same time, some producers may just fell the heat until the yellow metal resumes its bull trend.

The high volatility in oil prices have forced gold companies to hedge their oil needs. Even the world's biggest gold producer- Barrick Gold- had to hedge oil prices considering the uncertainty in the markets. “As the oil spike relates to our cost structure, we've got things under control. But as far as what an oil price rise means to the broader economy, obviously we have some concerns there”, Reuters quotes Barrick CEO Aaron Regent.

Some analysts argue that high oil prices can dent the profits of gold miners even if gold climbs. And as the producer is forced to mine for lower grades, the company yields lower gold for every processed rock with energy costs remaining the same- and this situation of lower yields and higher input cost will inevitably lead to lower profits for the gold mining companies.

The market seems to have picked up on the reasoning as well as gold stocks have constantly underperformed gold prices for most of the gold's bull market- a period when input costs like energy, labour and other prices have been rising as well.

Chart showing performance of Gold (GLD etf) and Gold mining companies (GDX etf)

Gold Price Heads for 2nd Monthly Drop, "Uptrend Needs New Investment" as Saudi Arabia Tries to Talk Down Oil Price

The Gold Price retreated below last week's finish Thursday morning in London, heading for its second monthly fall in succession against all major currencies bar the Japanese Yen.

Italian and Spanish debt prices fell amid fresh bond sales and a national strike respectively, while Frankfurt's stock market fell for the 7th session in nine.

Crude oil slipped to a 1-week low after French prime minister Francois Fillon followed yesterday's news of a sharp rise in US stockpiles by saying the prospects "are good" for a joint Euro-US release of strategic reserves.

Down 2.0% in February, the Gold Price in US Dollars was trading at $1657 per ounce by lunchtime today – some 7.0% below the start of March.

Gold hasn't fallen for more than two months in succession since spring 2001 vs. the Dollar, autumn 2006 vs. Sterling, and mid-2007 vs. the Euro.

"The view that the US economic recovery is looking more sustainable is becoming increasingly accepted," wrote UBS analysts Edel Tully and Julien Garran in a new report on Wednesday, slashing the Swiss banks's 2012 average Gold Price target by 18% to $1680.

"Gold is at risk, for it needs persistent inflows of investor money to keep it on its upward trajectory."

"Investors need to put in well over $100 billion to the gold market in 2012 to keep prices high," said GFMS chairman Philip Klapwijk at a CME conference in Singapore today, quoted by Reuters.

Globally, Gold Investment demand rose 33% by Dollar value to $83bn in 2011, according to GFMS data.

Klapwijk forecasts a "short-term" drop in the Gold Price below $1600 per ounce.

New data today showed Russia selling down its Gold Bullion reserves for the first time in 5 years last month.

Slipping by 3.8 tonnes, Russia's gold reserves have doubled by weight since 2007 to 883 tonnes, and quadrupled as a proportion of its total foreign exchange reserves by value to 9.8%.

Figures from Data Explorers, quoted by CityWire, say that hedge funds and other investors have sharply increased their short sales of Gold Mining stocks, with 10% of Chinese miner Zijin Mining Group currently out on loan.

"Indian [gold] demand has been dead for 3 months," said a senior Swiss logistics executive to BullionVault on Thursday, as the strike by India's jewelry retailers protesting a hike in import duties to 4% by value entered its 14th day .

"Nothing's moving, everyone's waiting."

Jewelry demand in India – the world's #1 consumer market – "was reasonably positive" in the first two months of 2012, according to GFMS's Klapwijk, but the hike in India's gold import duties is denting sales.

"If the excise duty is corrected, the trade will be happy," MarketWatch quotes Bhargav Vaidya of the Bombay Bullion Association.

"The strike will not be indefinite, and customers will not go high and dry during [the key Gold Buying] wedding season."

Meantime in the UK – which the OECD today said has fallen back into recession – daily petrol sales jumped 81% and diesel sales by 43% on Wednesday, according to the Petrol Retailers Association, blaming Government minister Francis Maude for the "panic buying" by advising motorists to fill jerry cans ahead of a possible strike by tanker drivers next week.

More broadly, and with crude oil prices near all-time records in Sterling and Euros today, "It is the perceived potential shortage of oil keeping prices high – not the reality on the ground," says Saudi oil minister Ali al-Naimi writing in the FT today.

"There is no lack of supply. There is no demand which cannot be met."

"Used to be that Saudi Arabia produced more oil when it wanted lower oil prices," notes Olivier Jakob at Petromatrix. "Today, when Saudi Arabia wants lower prices it produces an op-ed in the Financial Times.

"It shows that you either do not want or can't produce more."

Also in the UK today, Bank of China Ltd applied for membership of the London Metal Exchange, the world's #1 base metals exchange.

BoC's UK commodities arm is the first Chinese-owned business to apply for membership. Barclays Capital reckons that China now buys some 40% of annual global demand for copper, aluminum and nickel.

In the last 3 months of 2011, Chinese households overtook Indian consumers as the world's top buyers of physical gold according to GFMS data, despite the Gold Price recording its second-ever highest quarterly average against the Yuan.

India to Review Gold Tax

But duty hike on Gold Bullion imports to stay...

IN A MAJOR reversal, India's government has said it will review the tax on unbranded gold jewelry, following 12 days of protests by gold traders across India, writes MineWeb's Shivom Seth in Mumbai.

Following an uproar in Parliament, the Indian government has stipulated that it will tweak the tax on gold jewelry but will not roll back the duty on gold imports,

The doubling of import duty on gold came in for severe criticism from opposition party members in India, during the debate on the Union Budget 2012-13 in Parliament. Allied political parties have joined the opposition members on the issue, in a bid to pressurize finance minister Pranab Mukherjee to consider a rollback.

Following the nationwide strike by jewelers, former finance minister Yashwant Sinha pressed for a rollback of the excise duty on non branded jewelry and called for doing away with the requirement of a PAN card to Buy Gold jewelry worth $3936 (Rs 2,00,000).

PAN or Permanent Account Number refers to a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department in India. It is a must to have a PAN number for all those who file their income tax returns. The recent budget has stipulated that any transaction at the jewelers over $3936 would necessitate a PAN card. Sinha has called for the practice to be abolished.

The budget proposal to include unbranded jewelry in the ambit of 1% excise duty on branded jewelry has led to protests and strikes by bullion dealers. Replying to Sinha, Pranab Mukherjee told members of Parliament, ``I understand the plight of small jewelers and an acceptable solution will be found. There is no intention to harass anyone. The argument was that all states were charging value added tax. When you can pay value added tax, you can easily pay excise duty. But let me assure that I am considering it.''

Key political ally DMK joined the opposition members in demanding a rollback of the hike. Participating in the budget debate, DMK leader Kanimozhi said, ``The increase in import duty on gold to 4% is bound to add pressure. It will lead to smuggling.'' Higher import taxes on gold would affect demand in India, where households view the precious metal as a saving instrument, she said.

In Parliament, the issue was raised by different political parties – Arun Jaitley from the BJP, Sukhendu Sekhar Roy of the TMC and Tapan Sen of the CPI (M). West Bengal's industries and commerce minister, Partha Chatterjee, and TMC members have written to the Centre asking for a review in customs duty on gold and excise on jewelry.

While agreeing to reconsider some of the tax proposals on unbranded jewelry, Mukherjee reiterated his resolve to bring jewelers under the tax net under a new formulation. He also made it clear that he needed more time to study the legal implications of whether or not it would come into force immediately.

"I know it (gold) is part of our culture...but the import of gold of such magnitude strains balance of payments and affects exchange rate of the rupee through impacting supply-demand balance of foreign exchange,'' Mukherjee told Parliament members. He expressed concern over the out flow of precious foreign exchange on the import of ``dead assets that cause problems in the country.''

Referring to gold mined in India, he said, the quality of the country's gold bearing ore was ``extremely poor'' and as a result, it was uncompetitive to mine such ore to produce the precious metal indigenously.

India has around 30 gold mines. Each tonne of Indian gold bearing ore yields only 22 grams of gold, Mukherjee said, adding that experts opine that unless each tonne of ore does not produce 45 to 50 grams of gold, then the exercise becomes uncompetitive.

India produces around two tonnes of gold a year against the imports of 900 tonnes, he added.

Though the government has said there will be no step down from the import duty hike on gold and platinum to 4%, the government's proposal "to come out with an acceptable formula'' has left jewelers undeterred in their fight for a rollback, with most deciding to continue with the strike.

Jewelers in Nashik, Maharashtra have decided to continue their strike indefinitely. A decision in this regard was taken at a meeting organized by the Maharashtra Gold Jewellers' Association in Mumbai.

A delegation of the All India Gems and Jewellery Trade Federation recently met the All India Congress Committee member Digvijay Singh, who has assured the delegation that he would discuss the matter with Congress president Sonia Gandhi and Prime Minister Manmohan Singh.

Bachhraj Bamalwa, chairman of the Federation which called for the nationwide strike said members would continue with their demand to roll back the import tax hike.

"Though the finance minister has shown optimism in his speech, we will continue with the strike and will open our shops only after the excise duty and tax on cash purchase are rolled back,'' said  Zaveribhai Shah, president of the Jewellers Association, Ahmedabad.

US gold and copper slide as dollar steadier

NEW YORK, March 29 (Reuters) - U.S. gold futures slipped

Thursday as the dollar recovered and copper eased more following

its weaker performance in the previous session.

       
     FUNDAMENTALS
     * Gold prices slipped under $1,680 an ounce, extending a
fall from 2-week highs into a third session as the dollar
recovered from near a one-month low and crude oil values turned
lower.
    * Copper was off following a 2 percent fall in the previous
session although doubts over demand in China and the pace of
economic recovery in the U.S. made investors cautious.
    * China's Minmetals Resources plans to use its C$1.3 billion
Anvil Mining acquisition as a platform to buy more copper assets
in central and southern Africa.
    * South Korea's Hyundai Steel expects the steel market to
recover in the second half of this year led by a pickup in
automobiles and construction despite high oil prices, weak
Chinese demand and euro zone debt issues.

    ECONOMY
    * Germany's March unemployment rate fell to 6.7 percent from
6.8 percent in February.
    * The March euro zone economic sentiment index fell 0.1 to
94.4, compared with the expected 94.6.
    * Final fourth quarter U.S. GDP at 0830 EDT (1230 GMT) is
seen unchanged from the second estimate at 3.0 percent.
    * U.S. initial jobless claims at 0830 EDT are expected at
350,000, up from last week's 348,000.
         
    MARKETS
    * Global stocks dipped after disappointing U.S. data
tempered the outlook for the world's biggest economy while the
price of oil stabilized following some sharp losses.
    * The euro fell against the dollar as concerns about
contagion from the euro zone debt crisis overshadowed a solid
Italian bond auction.
   
 Prices at 7:17 a.m. EDT (1117 GMT)                      

                               LAST      NET    PCT     YTD
                                         CHG    CHG     CHG
 US gold                    1655.60    -2.30  -0.1%    5.7%
 US silver                   31.825   -0.006   0.0%   14.0%
 US platinum                1635.40     0.20   0.0%   16.8%
 US palladium                647.50     0.15   0.0%   -1.3%
 US copper                   377.05    -2.20  -0.6%    9.7%
   

US GAS : Futures Sell Off Ahead Of Inventory Report

NEW YORK (Dow Jones) --Natural gas futures sank Thursday ahead of a weekly report expected to show an unusually large build in U.S. inventories, amid weak demand.

Natural gas for May delivery recently fell 3.8 cents, or 1.6%, to $2.244 a million British thermal units on the New York Mercantile Exchange.

The even-cheaper April contract expired Wednesday at a fresh 10-year low of $2.191 million British thermal units.

The Energy Information Administration's weekly survey is expected to show natural gas inventories last week rose 46 billion cubic feet, sharply topping the year-ago level and the five-year average for the week.

If the survey is correct, the data would put inventories at 2.426 trillion cubic feet, 50% higher than a year ago and a record high for the week. Inventories would be 47% above the five-year average for this time of year.

Last year this week, inventories rose just 7 billion cubic feet.

"We feel that odds heavily favor additional selling following release of today's weekly EIA storage report," according to Jim Ritterbusch, head of the trading advisory firm Ritterbusch and Associates.

The sizeable build is expected amid weak demand for natural gas in the face of near-record production. The unusually mild winter and early spring has clobbered demand for natural gas used to heat homes and offices, leaving natural gas stores brimming and prices at their lowest levels in 10 years.

The unusually large spring inventory builds has raised fears among market observers that stockpiles could reach capacity when inventories peak in the autumn. Such an event would send prices sliding even further, as buyers disappear amid an absence of locations to store gas, according to analysts.

Front-month natural gas prices have already fallen 25% this year.

The mild temperatures are likely to persist for the foreseeable future, according to weather forecasts, suggesting that heating demand is unlikely to see a significant return this season. Commodity Weather Group said it sees above-average temperatures on the gas-consuming East Coast through the next two weeks.

Natural gas for next-day delivery at the benchmark Henry Hub in Louisiana recently traded at $2.02/MMBtu, according to IntercontinentalExchange, compared with Wednesday's average of $2.0482/MMBtu. Natural gas for next-day delivery at Transcontinental Zone 6 in New York traded at $2.19/MMBtu, down from $2.2056/MMBtu.

Limited Demand For Indian Public Sector ETF

India ETF

            India’s ongoing need for asset sales to help fund its budget deficit were behind one of the less likely ETF proposals floated this month. According to the Economic Times, the finance ministry is considering setting up a “PSU ETF” to take on stakes in state-controlled companies—known as Public Sector Undertakings—that the government wants to divest. For the government, the appeal is obvious. Such an ETF would not only allow blocks of shares in several firms to be sold off quickly and easily, but might reduce the problem of poor stock performance that has dogged previous PSU divestments. If enough patriotic retail investors could be encouraged to buy and hold the ETF, the share prices of companies involved would hopefully hold up better than they have in the past. But from an investor’s point of view, the value of such an ETF seems very limited. The PSUs are of variable quality and the majority stakes held by the state leaves them under obvious pressure to put national interests ahead of private shareholders, as some activist investors are currently alleging. Even where an investor is willing to accept this conflict, there are few good arguments for investing in such a disparate group of stocks as a whole purely because they are all state-run firms. And in any case, it’s hard to see such an ETF really getting off the ground—the current structure of the local ETF market suggests the demand wouldn’t be strong enough to make a difference. To put it into context, the government’s target for PSU divestments for this fiscal year is Rs 30,000 crore, or about US$5.9 billion. Yet as of last week, India had 33 listed ETFs, with a total of just US$2.1 billion in assets under management. Even more tellingly, about three-quarters of that sum is held in gold ETFs, reflecting local investors’ strong preference for precious metals over most other assets. While that remains the case, any PSU ETF would seem likely to have to scramble for a very small share of the market indeed. In fact, ETF development in India has almost stagnated lately, with few providers showing signs of doing more than jumping on the gold ETF bandwagon. The only new listing this month was yet another such product, this one from Canara Robeco, a joint venture between state-owned Canara Bank and Dutch asset management group Robeco. This is the 13th gold ETF to make it to market and it is hard to see how it will stand out from its peers. Even the total expense ratio of 1.5 percent— although high by global standards—falls towards the middle of the range for India. With the Goldman Sachs-owned Benchmark Asset Management holding around 35 percent of gold ETF AUM, Reliance overseeing another 30 percent and HDFC managing around 10 percent, the market is heavily concentrated and gaining scale is difficult for new arrivals. Still, the forthcoming 14th entrant in this increasing crowded field is at least trying to differentiate itself. Backed by independent fund house Motilal Oswal, the MOSt Shares Gold ETF will allow even relatively small investors to redeem their units for gold bars on demand, something that could be a selling point with retail investors who have traditionally bought physical gold from jewelers. Whether that will be enough to make it a success remains to be seen. But it is at least a hint of innovation in a market that now risks lagging behind the rest of Asia. Lyxor Leaves Hong Kong, Steps Up In Singapore Lyxor has completed its regional refocusing by delisting all of its 12 Hong Kong-listed synthetic ETFs. As first reported towards the end of last year, the French provider has decided to quit the Hong Kong market for reasons that were widely thought to be related to the Securities and Futures Commission’s tougher rules on synthetic ETFs, although executives have since said that it was driven more by an intention to focus on institutional clients. Lyxor now plans to base its Asian business around listings in Singapore, where the regulator has so far focused on restricting access to ETFs to investors with a certain level of expertise rather than imposing tougher rules on the structure of the products. This month it launched two additional funds on the Singapore Exchange, bringing its total listings locally to 28. The new products are Southeast Asian country trackers, following the Thailand SET50 and the MSCI Indonesia indices. Both are total return products that capitalise dividends and have total expense ratios of 0.45 percent and 0.55 percent, respectively. Also in Singapore, Malaysian banking group CIMB added its second product locally (and fourth overall), with the launch of the S&P Ethical Asia Pacific Dividend ETF. This aims to produce a yield of 4.5-5.5 percent while investing in stocks that have less than 5 percent revenue exposure to alcohol, gambling, tobacco and pork (the last reflecting a desire to attract investors who adhere to Islamic principles). The index holds the top 40 stocks in the Asia Pacific region that pass this ethical screen, weighted by dividend yield, and the result is a fairly unusual portfolio that looks unlike existing regional ETFs. The fund has around 30 percent in China and Hong Kong, 25 percent in Australia and 20 percent in Singapore, while in sector terms, financials, industrials and telecoms each account for around 25 percent. Major individual holdings include Chinese construction machinery group Lonking, Hong Kong clothing retailer Giordano, Indonesian fuels and chemicals distributor AKR Corporindo and Australian electronics retailer Jb Hi-Fi, as well as more widely held income plays such as China Mobile, Singapore Press Holdings and Telekomunikasi Indonesia. The fund uses physical replication, distributes dividends and has a TER of 0.65 percent. China Approves Cross-Market ETFs There were no new launches in mainland China, with the biggest news being the regulator’s decision to approve two cross-market ETFs from Harvest and Huatai-PineBridge. These should not be confused with the long-awaited cross-border ETFs that will allow mainlanders to invest directly in foreign stocks; instead, these will be the first mainland ETFs to hold stocks listed on both the Shanghai and Shenzhen stock exchanges. Both funds will track the CSI300 index, with the Harvest fund to be listed in Shenzhen and the Huatai-PineBridge offering to list in Shanghai. With the CSI300 increasingly seen as the key benchmark for the mainland stock markets, these funds are expected to see significant interest from investors. BetaShares Launches Cash ETF, Other Launches Elsewhere, Australian provider BetaShares expanded its range with a new launch aimed at income-hungry investors looking for maximum flexibility. The Australian High Interest Cash ETF will place all of its assets into high interest instant access and term deposit accounts with one or more of the major banks in Australia—at present, all cash is deposited with Westpac. The average rate on the ETF’s holdings is currently 5.2 percent and the TER is 0.18 percent. There were two new launches in Korea. Market leader Samsung expanded its Kodex range with a money market product, the KRW Cash ETF. This invests in Korean government bonds with a maturity of less than one year and has a TER of 0.15 percent. Meanwhile, Kiwoom Securities, a brokerage firm that has started moving into asset management over the last couple of years, made its debut in the ETF business with its iKon100 ETF. This is a price return product that will track the Kospi 100 benchmark. It uses physical replication and has a TER of 0.3 percent. And in Japan, Nikko Asset Management listed the Tokyo exchange’s third fixed income ETF. The Listed Index Fund Emerging Bond tracker will follow the Barclays Capital Emerging Markets Local Currency Government Bond Index, with the maximum weighting to each country capped at 10 percent. The TER is 0.45 percent. Lastly this month, the Philippines may be a step closer to listing its first ETFs, according to a report in Ignites Asia. The country has fallen behind its regional peers in developing a domestic ETF market due to limitations in the local legislation governing funds that make it unclear how they should be regulated. Potential changes to these rules that would provide a framework for ETFs have been proposed for many years, with few concrete signs of progress. But the Philippine Stock Exchange and the Securities and Exchange Commission are apparently in reasonably advanced discussions, with the possibility that rules could be finalised within a couple of months and the first funds launched by the end of the year.

Silver Wheaton Corp’s net earnings rise 92% on record production

Silver Wheaton Corp (TSX:SLW, NYSE:SLW) has reported record revenue, earnings and operating cash flows on record production of silver at 25.4 mn silver equivalent ounces (24.6 million ounces of silver and 18,400 ounces of gold) , a 7% gain compared to 2010.

The company reported that revenue increased 73% compared to 2010, to US$730.0 million, on silver equivalent sales of 21.1 million ounces (20.2 million ounces of silver and 18,300 ounces of gold).

Peñasquito mine was the primary driver of our production growth, as the mine continued its ramp up to full design capacity of 130,000 tonnes per day. Silver Wheaton's 2011 attributable silver production from the mine was 5.3 million ounces, an increase of 39% compared to 2010.

"Silver Wheaton finished 2011 with its strongest ever quarter of production and sales," said Randy Smallwood, President and Chief Executive Officer of Silver Wheaton. "We are proud to have now grown for three consecutive years, and in 2011 we achieved record annual production levels of over 25 million silver equivalent ounces. The combination of increased silver equivalent sales and strong silver prices also generated record financial results including revenue, earnings, operating cash flows, and cash operating margins which increased a tremendous 82% to US$30.61 per ounce of silver."

"The exceptional growth in cash flows allowed us to initiate an inaugural dividend, which grew threefold by year-end, and positions the company to quickly capitalize on new acquisition opportunities. We are now stronger than at any other time in our company's history, and more capable than ever of helping mining companies achieve their production and expansion goals by providing value-enhancing silver streaming funding. And, with low fixed costs, an exceptional production growth profile, and more silver reserves than any other silver company in the world, we believe we offer the premier investment vehicle for silver investors worldwide."

2012 Outlook
-Goldcorp Inc.'s world-class Peñasquito mine is forecast to achieve full production capacity of 130,000 tonnes per day by the end of Q1 2012. This cornerstone asset is poised to become our largest contributor of silver and will drive our production growth in 2012. As a result, Silver Wheaton anticipates a 6% increase in its 2012 attributable production to approximately 27 million silver equivalent ounces, including 16,500 ounces of gold.
-Given the Company's unique business model of essentially fixed cash costs2, average cash costs in 2012 are estimated to be approximately US$4.071 per silver equivalent ounce, virtually unchanged from 2011.
-Executing on its growth strategy of acquiring additional value-enhancing silver and precious metals streams will remain Silver Wheaton's top priority in 2012.

recious metals beat gold as cyclical assets rally

Gold price falls, platinum price rallies as global growth confidence continues to improve. The gold price fell to its lowest level in two months last week as continued improvements in US economic data and an increase in the Fed’s assessment of the economic outlook cuased investors to reduce their expectations of further near-term monetary easing.

While the recent price correction has pushed gold down below its 200-day moving average, underlying structural fundamentals supporting the gold price such as low real interest rates, currency debasement concerns, sovereign debt risks, emerging market central bank diversification of reserve assets into gold, rising China consumer and investor demand, have not changed.

Perhaps not surprisingly, with confidence in a sustainable global growth rebound improving, cylically-sensitive precious metals such as platinum and palladium are benefitting, with the platinum price surging above the gold price last week for the first time in six months. As long as this growth optimism continues, the more cyclically sensitive precious metals will likely continue to outperform.

India doubles gold import duties in an attempt to slow rising current account deficit. India’s finance minister, in his budget speech, announced that the basic customs duty on standard gold coins and bars will be increased fom 2% to 4% in a bid to reduce the current account deficit.

Mr Muherjee noted that ‘one pf the primary drivers of the current account deficit has been the growth of almost 50% in imports of gold and precious metals’. The rise in duties is expected to be passed onto consumers by jewelers and likely to be another constraint on the world’s largest jewellery market at a time when the Indian rupee is hovering near 2-month lows against the US Dollar.

Zimbabwe pushes ahead with ‘indigenisation’ plans. Impala Platinum’s Zimbabwean subsidiary, Zimplats, has agreed to transfer a 51% stake to local indigenous groups and the government after a threat by the government to nationalise the company. Platinum Group metals prices have remained well supported despite the selloff in both gold and silver in recent weeks.

Global growth and US housing data likely to be main market focus this week. The release of US housing data is likely to be a key investors focus this week, with strong data expected to add to investors’ confidence in the US economic recovery and continue to support cyclical precious metals.

In Europe, investors’ will scrutinize Eurozone industrial new orders as well as advance Purchasing Manager Index (PMI) readings to gauge whether the US recovery is spilling over to Europe.

Courtesy: ETF Securities Research

Copper prices rise by 0.22%

Copper prices rose on Friday as a result of upbeat US economy as new U.S. claims for unemployment benefits dropped to a fresh four-year low last week, offering evidence the jobs market recovery. At the MCX, copper futures for April 2012 contract were trading at Rs. 430.85 per 1 kg, up by 0.22%, after opening at Rs. 430.50 against the previous closing price of Rs. 429.90. It touched the intra-day high of Rs. 431.40 till the trading. (At 10.52 AM today). The US Labour Department said 348,000 initial jobless claims were filed in the week ending March 17, down from a revised 353,000 in the previous week. Three-month copper on the London Metal Exchange rose 0.77 percent to $8,354 a tonne Copper is a key ingredient in plumbing and wiring, making it most appetizing for developing and emerging economies on urban building sprees At COMEX, copper futures for May 2012 contract traded at US$3.7950 per pound, up by 0.007 per cent. It opened at US$3.7730 against the previous closing price of US$3.7655. It touched the intra-day high of US$3.7980 till the electronic trading. (At 09.49 am IST). Yesterday, prices fell after manufacturing data on China that showed factory activity in the world's top metals consumer shrank for a fifth month. The headline flash HSBC/Markit manufacturing purchasing managers' index fell to a four-month low of 48.1 in March from 49.6 in February 

Zinc prices rise by 0.54% on higher demand

Zinc prices rose by 0.54 per cent on Friday as the traders enlarged their holdings tracking the steady global trend and the increasing domestic demand. Zinc futures for February 2012 contract, at MCX, were trading at Rs. 102.45 per kg, up by 0.54 per cent after opening at Rs. 102 against the previous closing price of Rs. 101.90. It touched the intra-day high of Rs. 102.70 till the trading. (At 02.41 PM today) Sentiment improved further as a result of upbeat US economy as new U.S. claims for unemployment benefits dropped to a fresh four-year low last week, offering evidence the jobs market recovery. The US Labour Department said 348,000 initial jobless claims were filed in the week ending March 17, down from a revised 353,000 in the previous week. Zinc is the fourth most widely used metal after steel, aluminum and copper in the world. Yesterday, prices fell as weak manufacturing data pointing to a slowdown in China and the euro zone dampened sentiment on the industrial metal. The headline flash HSBC/Markit manufacturing purchasing managers' index fell to a four-month low of 48.1 in March from 49.6 in February The Markit Eurozone PMI Composite Output Index fell from 49.3 in February to a three-month low of 48.7 in March. 

Copper Continues to Confound the Commodities Crowd

Source: Mickey Fulp, Mercenary Geologist  (1/30/12)

"In the long run, we will continue to use more copper worldwide every year than we are discovering in new deposits and developing into new mines. Therefore, I remain a long-term secular bull for copper, as the citizens of emerging market countries demand the electricity, modern-day transportation and myriad of consumer goods and conveniences that we view as necessities in the developed world."

Loyal subscribers know I often opine that world markets are in the midst of a secular bull market for commodities, or "stuff," as my recently passed friend Clyde Harrison was so fond of saying. Despite his traitorous penchant for Coors Light (instead of the classic St. Louis-brewed lagers), Clyde was one of those fellow Missourians who always had to be shown, and we all miss his wry wit, sense of humor and insight into the speculative commodities markets.

You may also be aware of my many writings and interviews on the supply-demand fundamentals of copper, the metal with a "Ph.D. in Economics." Copper is the one commodity that most directly reflects the near- and mid-term health of the world's economy.

The modern copper industry started in the early 1900s with advent of large, mechanized open pit mines that could mine lower grades through economies of scale. Development of these mines was coincident with the demand for and delivery of electricity to the industrialized world. Copper cable and wire is necessary for efficient transmission of electrical power and remains the main use of the metal.

Most of the easily exploited surface deposits of copper were discovered long ago. For many decades now, explorationists have depended on indirect surface geology clues, subsurface geophysics, geochemical sampling, and remote sensing to target and discover new economic deposits of copper that do not crop out. Increased exploration over the past eight years has resulted in discovery of major new resources, but long lead times to development and mining continue to hamper primary supply. The copper market will be "tight" for the foreseeable future.

As geologists and engineers, we simply are not finding, developing, and mining enough copper to meet future projections of 4% growth year over year. The world currently uses about 20 million tonnes (Mmt) of copper a year, mine production is flat at about 16.5 Mmt, and the growing shortfall is made up by increased recycling of scrap. Most of the increased demand will come from rapidly growing middle classes in the BIIC countries, and this bodes well for the near-, mid-, and long-term price of copper.

With worldwide economic uncertainty and uneasiness, Dr. Copper wasn't feeling so well during the last half of 2011; he was not really sick but certainly was a bit mixed up and had a lingering case of the blahs.

Despite less than robust supply and demand fundamentals, copper set all-time high price marks in the first half of 2011. I pointed to the dichotomy of rising inventory stocks and prices at the beginning of last year, commented that market fundamentals were unhealthy, and boldly predicted a correction.

We indeed saw some momentary dips in the mid-spring and mid-summer that shaved about 15% off an overbought market, but for the most part the red metal train kept rolling along. The much needed and long overdue correction finally came in early September for all resource commodities, when fears of the euro debt crisis resulted in a broad selloff in all speculative markets. Copper was predictably among the hardest hit with its persistently weak short-term fundamentals:

Since that precipitous four-week fall of nearly 30%, copper bounced off a low of $3.05/lb twice, hit a high spike of $3.75/lb, and until recently has been range-bound between $3.30 and $3.60/lb. It is showing renewed strength since the first of the year, with the latest spot copper close at a five-month high of $3.87/lb.

Let’s review the basics of copper supply and demand in 2011. Certain fundamentals supported copper’s all-time high prices, others reflected the Q3 correction and partial recovery, and a couple continue to confound the commodities crowd:

• Supply and demand have been essentially balanced for the past four years. As a result copper price has been sensitive to both supply disruptions (e.g., mine strikes, accidents, and infrastructure failures) and demand destruction (e.g., economic downturns and natural disasters). In 2011, we saw significant disruptions in copper supply, largely due to strikes at major mines in Indonesia, Chile and Peru.

Copper Production, Consumption and Balance in Millions of Tonnes

• Warehouse inventories represent surplus copper that is stored for want of an immediate buyer. In a normal supply-demand scenario, rising inventories are negative and falling stocks are positive for the near-term copper price.

However, for much of 2011 there was a disconnect in this key metric as copper prices rose from late November 2010 and into Q111, while London Metal Exchange (LME) inventories increased. High prices were maintained along with high inventories through the late summer. Subsequently, the 30% correction in September occurred along with rapidly falling LME inventories. This abnormal behavior has corrected recently as prices have rebounded while inventories continue to fall.

Concomitant with falling inventories, there has been a steep rise in cancelled warrants. Cancelled warrants represent copper that is scheduled for delivery and leaving warehouses. These have gone from yearly lows of 1-2% during the market correction to a current high of 24%:

The charts show persistently strong prices, high warehouse inventories and low cancelled warrants in the first eight months of 2011. It is now apparent that Chinese speculators and hoarders, including the infamous pig farmers, went on a massive selling spree during this time. As the correction came and went and the price stabilized, these same speculators were likely restocking their hoards.

This hypothesis is backed by recent jumps in Chinese demand for November and December. Additionally, recent Shanghai premiums to North American spot prices have been high.

However, plummeting prices for the Baltic Dry Index indicates that worldwide demand for industrial materials has been weak since the first of the year:

Baltic Dry Index One-Year Chart

Chinese tightening of monetary policy in 2011 was designed to cool off an overheated and speculative housing market and higher inflation, especially in foodstuffs. Food inflation is problematic for the country’s poor who spend up to 50% of annual incomes feeding their families. GDP growth slowed significantly in 2011 but still remained at a robust 9%.

According to the International Copper Study Group, Chinese imports were down 21% for the first 10 months of 2011. However, they bounced back significantly with December imports of refined copper reaching the second highest total on record at 344,000 tonnes. Although 2011 copper demand in China was off 5%, worldwide demand was up about 2%, and mine production was off 3%.

Increased recycling of scrap stimulated by record high prices satisfied the shortfall. The world copper market remains in a delicate supply/demand balance with mine production stagnating and scrap market supply satisfying increased world consumption.

January 23, 2012 marked the beginning of the 15-day Chinese Lunar New Year celebration, a period typically accompanied by much lower industrial activity and reflected in the abnormally low Baltic Dry Index. The strength of the copper price over the past week bodes well in the near-term as Asian traders and speculators return to markets in early February.

Despite 2011's mixed and conflicting signals, it appears that the copper market's fundamental indicators have largely returned to normalcy in early 2012. Lower warehouse inventories and increase in cancelled warrants are usual indicators for strong and rising near-term prices. On the other hand, the slowing Chinese economy and the plummeting Baltic Dry Index are negative indicators for industrial demand.

Taking all the various factors into account, I am bullish on the copper price in the near term. A general range of $3.50-4.00/lb in 2012 will provide high margins for producers and stimulate mine production, scrap sales and capital finance requirements for mine development. Prices near the recent bottom at $3.05/lb will result in supply destruction, particularly in the scrap market, while prices higher than $4.00/lb will lead once again to selling by speculators as we saw in the first half of last year.

The old adage "The cure for high prices is high prices" works equally well for low prices. Although copper is among the most speculative of commodities markets, it remains the best indicator of global economic sentiment and supply/demand fundamentals.

In the long run, we will continue to use more copper worldwide every year than we are discovering in new deposits and developing into new mines. Therefore, I remain a long-term secular bull for copper as the citizens of emerging market countries demand electricity, modern-day transportation, and the myriad of consumer goods and conveniences that we view as necessities in the developed world.

After a rough turn for the past few months, I think Dr. Copper is looking quite well and toward a very bright future. 

The Gold Sector Is On Sale: Michael Fowler

Michael Fowler, senior mining analyst with Loewen, Ondaatje, McCutcheon sees small- and mid-cap junior producers and developers as the "sweet spot" in the gold equities space, and provides a basket of names to consider in each space. In this exclusive Gold Report interview, he also shares his views on the irresponsibility of the "new paradigm" of large-scale financings now in vogue.

The Gold Report: Let's start with the changing risk picture in the gold space. Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and Kinross Gold Corp. (K:TSX; KGC:NYSE) are down by about 50% and 75%, respectively, from their 52-week highs. Both would once have been considered low risk. Are there no low-risk companies in the gold space today?

Michael Fowler: I think that is correct, Brian. Right now, any gold stock is fairly risky due to a combination of factors. First off, gold stocks and the gold price are very volatile. Second, gold mining is a tough business, subject to unforeseen circumstances. Despite the size of Agnico-Eagle, Kinross, even Barrick Gold Corp. (ABX:TSX; ABX:NYSE), I would attach a fair degree of risk to each.

TGR: If investors have to assume risk with gold equities, does it make sense to go with small- and mid-cap companies where the rewards can be higher?

MF: Yes, I think investors should be more focused on junior producers and, to some extent, explorers. That is where you will get the most gain. 

For example, since 2004, Barrick's share price has risen 12%/year, whereas the share price forRandgold Resources Ltd. (GOLD:NASDAQ), a junior producer, rose more than 40%/year. 

TGR: Before we leave the large caps, will companies like Agnico and Kinross get takeover bids this year?

MF: I do not think Agnico or Kinross will be taken over because the senior gold companies are learning that mega-mergers do not make much sense; they have not brought superior returns for shareholders. 

The other thing having an impact on the mergers and acquisitions space is that the share prices of the potential acquirers are declining. They no longer have currency for acquisitions. 

TGR: On March 14, the gold price dropped $40/ounce (oz); in late February it crashed $110/oz in one day. Is this due to the perception of a strong U.S. economy, or is that too simplistic?

MF: I think that is correct and somewhat simplistic. Before the recent release of good economic data, the feeling was that the Federal Reserve would enter into a third round of quantitative easing (QE3), to increase its balance sheet and monetary liquidity. Now that the U.S. economy is moving along at a reasonable, although slow, clip, the Fed is hesitant to go the QE3 route. As a result, gold has sold off.

TGR: Should we expect more of the same in 2012?

MF: While gold will be difficult in the short term, my thesis on gold is very bullish. The whole world is involved in increasing both the money supply and liquidity. Interest rates are very low and it seems as though the Federal Reserve will not increase them for the time being. Countries around the world are engaging in almost competitive devaluation of their currencies. For the longer term, this is very good for gold. 

TGR: When do you expect that uptick to occur, perhaps when the next battle over raising the U.S. debt ceiling starts? 

MF: That would help, I suppose. When the U.S. presidential election gets closer, there will be more fuel for gold. For the next month or so, gold will have a problem but after that, it will turn around.

TGR: Your varied coverage in the gold space generally consists of small producers and near-term developers. Are they the sweet spot in the gold space in terms of risk versus reward?

MF: Yes, in particular the junior producers. Eventually, the developers and explorers will catch investors' interest. We focus on this area because: number one, we see ourselves delivering service to our clients; number two, we believe the returns in the smaller cap names will outperform the larger caps.

I think the whole of the gold sector is on sale at the moment, although you have to be selective in where you invest.

TGR: What is the risk profile of the one-mine miners and developers versus the majors? 

MF: Quite frankly, it is high. In general terms, a multi-mine company has lower risk than a one-mine company. However, if you have one really good mine, that is better than having a number of very poor mines. 

Among developers, their biggest hope is to be taken over because the history of developers going on to be producers is not very good at all. 

I would recommend having a basket of junior producers and developers, such that you are not dependent on one particular company that could blow up. 

TGR: For developers, is this the best place to be just before they bring the mine into production?

MF: No. I'll expand on the answer to that question; there are various stages. The first place to be is in companies that have one or two mines and look to be growing by 20–25%/year.

The next place to be is in an emerging producer with good grades that could work out well. Lastly, I would suggest a developer that is likely to be taken over in one or two years.

TGR: Why are producing companies performing so poorly, given that most of the feasibility studies on their mines were done using a gold price of $1,000/ounce, hundreds less than the current price? 

MF: I think there are numerous factors behind that. One, investors can avoid all of the issues producers present by putting money into exchange-traded funds. Two, there have been some production hiccups recently, Agnico-Eagle among them. Three, some equities have been over-diluted. I have been critical of deals made where the company did not need the money, but nonetheless diluted its share base when the performance was not there. Four, there has been cost and capital inflation in the sector. 

TGR: One example of that is Lake Shore Gold Corp. (LSG:TSX). It just cannot get its price above $1.60/share, although it was well above $3/share not that long ago. 

MF: Lake Shore has been underperforming in terms of production expectations, and it is a very good example of what is going on in the industry right now, but Lake Shore is not alone. Kinross blew up because it paid too much for an acquisition. There have been all sorts of disappointments, which is one of the big reasons gold stocks look very cheap right now.

TGR: Do you remember another time when gold equities performed so poorly versus the gold price?

MF: The 2008–09 debacle comes to mind, but that was less to do with gold equities and more to do with the risk environment in the general market. Gold prices stayed fairly firm then, but gold stocks got clobbered in the risk-averse trading that went on. 

TGR: Should investors be concerned?

MF: They certainly should take account of what is going on. The good news is that many gold producers are showing margin increases because the gold price has gone up faster than cost inflation. 

There is a ray of sunlight coming through. We will not return to the same multiples we were at in the 1990s and mid-2000s. Instead, we will go back to something closer to the mean. Longer term, margins will continue to increase, earnings will go up and, eventually, so will stock prices.

TGR: Let's get to some of the companies you cover. Aurizon Mines Ltd. (ARZ:TSX; AZK:NYSE.A)operates the Casa Berardi gold mine in Québec, which is scheduled to run until 2020 or 2021. How does Aurizon plan to augment its production profile between now and then? 

MF: The main factor is its Joanna development project, located on the Cadillac break in Québec. It is going through a feasibility study right now, and indications are that it could be producing more than 100,000 ounces (100 Koz) out of Joanna by 2014. This would augment production from Casa Berardi, which produces about 160 Koz/year. 

Aurizon can also increase production at Casa Berardi, whose many potential working faces give it flexibility. In total, Aurizon's potential production is in the 240–270 Koz range, compared to the 160 Koz it is now producing. 

TGR: Its Marban exploration property also looks interesting. 

MF: Whether Marban will be a mine is a little bit up in the air at this moment. The interesting area at Marban is something like 200–300 meters below the surface. I think Aurizon would dearly love to see something closer to the surface in an open-pit scenario. I think the jury is still out on Marban. 

TGR: Does Aurizon have any upcoming catalysts for investors to look forward to?

MF: I think its Q411 financial results would be one. [Ed. note: after the interview Aurizon released Q411 financial results, including earnings of $21.8M, up from $7M in Q311.] It has been doing pretty well at Casa Berardi. That is not an easy mine, but Aurizon is cranking cash flow out of it. 

The main catalyst will be the feasibility study at Joanna. The company lowered the expectations for Joanna close to a year ago. A robust number out of Joanna will catalyze Aurizon's share price. 

In addition, Aurizon Mines is a fairly cheap stock for a producer compared to others. 

TGR: What is another store in your coverage universe?

MF: We like Northern Freegold Resources Ltd. (NFR:TSX.V). A lot of the Yukon plays are limited to helicopter trips into their properties, while Northern Freegold benefits from a road and a nearby power line. The property is a large, porphyry-style project. It hosts about 6 million ounces (Moz) gold equivalent (Au eq), 2.8 Moz gold per se, with copper in the deposit. The stock trades at $5/oz on an Au eq basis, which is exceedingly cheap, compared to an average of around $50/oz or so. There is a lot of potential to increase the resource. 

TGR: Why is it meaningful that this is a porphyry system?

MF: In this case, it means it is a large, open-pit, fairly low-grade deposit. You have to be a little careful with this type of deposit, making sure it is near infrastructure and that the geometry and metallurgy of the deposit are good. Northern Freegold has gone some way down the path of assuring those things. It also has new management, which is making great efforts to make people aware of its story.

TGR: This is a copper-gold-molybdenum deposit. Large copper-gold deposits have been developed in British Columbia (B.C.) before, but not in the Yukon.

MF: Correct. Some B.C. mines have fewer infrastructure advantages than this one, so there's no reason why the Yukon couldn't have a large open-pit type of operation.

Western Copper and Gold Corp.'s (WRN:TSX; WRN:NYSE.A ) Casino project is just down the road. It is going through a final feasibility study and the company is very optimist about bringing its porphyry deposit into production. I think Northern Freegold actually has infrastructure advantages over Casino.

TGR: Can you give us another name?

MF: We like Fortune Minerals Ltd. (FT:TSX), with two very large projects. One is NICO, a cobalt-gold-bismuth-copper deposit. It has about 1 Moz gold. That project has a full feasibility study and is going through a permitting study now. I think the company would like to joint venture NICO into production. 

The other is the Mount Klappan coal project. It is anthracite, better known as metallurgical coal. Because our focus is gold, I will be brief. Metallurgical anthracite can be used in producing steel, and there is a tremendous market demand right now. The company's partner at Mount Klappan is Pohang Iron and Steel Co (PKX:NYSE), also called POSCO.

If you add the net present values of those two projects together from the feasibility studies, you arrive at close to $5/share for each Fortune Minerals share, at an 8% discount rate. It is now trading around $0.96/share. I see a lot of value here. I think that joint venturing the copper-gold deposit at NICO will take out the financing risk and the share price should gain as a result.

TGR: You are on a roll, Michael. Do you have any other names you want to discuss? 

MF: Clifton Star Resources Inc. (CFO:TSX.V) is trading around $1.75/share. It has a project close to Rouyn-Noranda, Québec. To my mind, Québec is almost the best place in the world to find a deposit. Its Duparquet project has already outlined 3 Moz gold in several NI 43-101 reports and will release a revised resource in April. I think it may be closer to 5 Moz gold at 0.5 gram per tonne cutoff. 

Earlier, the B.C. Securities Commission cease-traded this stock because it found disclosure deficiencies. Now, new management is in place and the fundamentals and the resource are still there. We feel it has good potential for becoming a mine and for a joint venture or being taken out in time. 

I should mention that Osisko Mining Corp (OSK:TSX) was in a joint venture with Clifton Star, but Osisko walked from the project because it didn't see it as a Malartic bulk-tonnage situation. The mineralization is more discrete, but that does not take away from its mineability.

TGR: Is Clifton Star undervalued given the recent changes?

MF: I think so. We like to see valuations below $25/oz in the ground, and to some degree, that is why we picked Northern Freegold and Moneta Porcupine Mines Inc. (ME:TSX.V). Clifton Star trades at $25/resource ounce, based on a $5 Moz project. That valuation includes the fact that Clifton Star will have to raise approximately $50 million (M) to fulfill its obligations as an option to buy 100% of the property. 

TGR: Tell us about Moneta Porcupine and its project on the same fault line as Clifton Star's. 

MF: Aurizon Mines, Clifton Star and Moneta are all on big, east-west fault lines. Moneta Porcupine is on the Ontario side of the border with Québec, on the Destor Porcupine Fault. Moneta recently came out with a very pleasantly surprising resource on what it calls the Golden Highway project of 3.14 Moz gold. It trades at roughly $10/oz in the ground, which is cheap. Moneta seems to be successfully tying up some of the pits outlined in its resource study.

TGR: Is it difficult for juniors like Moneta Porcupine and Clifton Star to raise money, given that they are pure exploration plays?

MF: The financing environment is a bit eclectic at the moment and probably is getting worse as we speak. But there is money out there, focused on selective companies or selective deposits. 

We usually find that the time to invest in a company is when essentially nobody likes the sector. You do not want to be buying when every institution is buying; that is a good signal that you are on a high.

I want to emphasize that we have seen a lot of companies raise $20M or $30M when they did not need the money. There is a new paradigm going on. We used to raise money for one or maybe two field seasons, and the amount raised was $5–10M, maximum. Today, some of these guys are raising $30–40M. Quite frankly, I think that is irresponsible. 

TGR: That's a pretty brash statement. 

MF: Over-equity dilution depresses the company share price. From the companies' perspective, managements are running scared. They say that they have to raise money now to take care of themselves for many years.

But you have to ask why institutions are giving juniors money every time they come back to the well. If you give a company $40M, you will not see that company for the next five years; it can do anything it likes with the money. Management no longer has any incentive to perform on the exploration programs. There is no accountability in the one- to two-year time horizon. 

I do not think that is a good thing.

TGR: Do you have any other parting thoughts for us? 

MF: I realize that I have talked a lot about problems, but essentially I believe the gold price will rise. In particular, junior producers will be the first to start moving, their cash margins will increase and their earnings will rise. Then, some of these junior explorers and developers will participate in the upcoming bull market. 

TGR: Michael, thank you for talking with us today. 

Michael Fowler, senior mining analyst with Loewen, Ondaatje, McCutcheon Ltd., has worked in the investment industry since 1987 as a base and precious metals mining analyst for numerous high-profile firms. His coverage list included the major North American gold mining companies, but is now focused on small- to mid-sized companies. Previously, Fowler worked as a geophysicist involved in mineral exploration for 10 years. He was involved in the discovery of the high-grade Cigar Lake uranium mine in Northern Saskatchewan in the early 1980s. Fowler holds a Master of Business Administration from Cranfield University, UK; a Master of Science in mineral exploration from Leicester University, UK; and a Bachelor of Science in geology with geophysics from Liverpool University, UK. He is a member of the Institution of Materials in the UK and a member of the Canadian Institute of Mining and Metallurgy.