Source of Rumour: Canaccord Capital's Analyst wrote the following:
NEWS
* SENIOR GOLDS INDUSTRY UPDATE
Barrick identifies options if gold remains weak.
Barrick's chairman, Peter Munk, blames the central bankers for wiping
out about US$32.0B of value from their accounts in the past few months
on gold sales, and on raising concerns about additional gold sales
ahead. Mr. Munk plans on going to Europe next month in an attempt to
instill some sense into the bankers, whom he believes are out of touch
with the impact they are having on the gold market. Essentially, what
he would like is for the European central banks, using one voice, to
determine and clearly state its gold policy.
Note that we believe additional gold sales are likely to occur (and Mr.
Munk seems to concur with this assessment)-which is at odds with some
commentary from other analysts recently quoted in the press. If
additional gold sales occur, it is not necessarily bearish for gold.
It depends on how much, and over what time period the sales take place.
We believe the gold market can absorb 5.0-10.0M ozs. of central bank
gold sales annually, and rally from current levels. Moreover, if gold
prices remain at current levels for a few years, the amount the gold
market would be able to absorb would likely grow to 20.0-30.0M ozs. as
mines close.
If Barrick determines that the central banks are willing to create a
multi-year structural imbalance in the gold market, during which time
gold prices trend sideways to lower, Barrick has several options
available. The more conservative option is for the Company to alter
its hedge position, which currently stands in excess of 10.0M ozs. at
US$410/oz. One scenario outlined by Mr. Munk is for Barrick to
deliver half of its gold into the spot market, and half against the
hedge. This would result in a US$347/oz. gold price realization at
current spot gold prices of US$283/oz., but it would enable Barrick to
roll its hedge and extend the hedge's life to approximately nine years
from the current three years. We estimate that Barrick would remain
profitable, realizing positive earnings and cash flow in this example.
A far more radical approach that Mr. Munk touched upon would be for
Barrick to liquidate its hedge, sell its gold assets, and enter a new
business. He mentioned nickel, but we do not believe he was referring
to a potential bid for Inco. Rather, according to Barrick, a reporter
discussed the recent press regarding a possible takeover of the nickel
giant, and since this example was fresh on Mr. Munk's mind, he used
the nickel industry as an example. Moreover, we believe Barrick would
need to be convinced that a real multi-year structural change has
occurred that will keep gold prices at current or lower levels in
order for this scenario to occur. Mr. Munk does not currently believe
this will happen, and neither do we. Rather, we both agree that
current gold prices do not appear to be sustainable for two or more
years-unless central banks have an agenda to keep gold prices
depressed-which neither of us believe is the case. He compares this
cycle to the one that had sent gold to US$850/oz. in 1980-just in
reverse. His rational for believing that central banks do not want to
keep gold prices depressed appears to be linked to the negative effect
current weak gold prices are having on Franco African countries, South
Africa, and other third-world nations. He notes that these are the
very nations the central banks are attempting to support.
We believe that if gold prices remain at current levels for 6-18
months, many mines would close, which would enable the gold market to
absorb an enormous supply of central bank gold. This scenario is why
we have chosen Barrick Gold, Freeport-McMoRan Copper & Gold, and
Placer Dome as BUYs, and Newmont Mining as an ACCUMULATE below
US$30.00/share. They are all well positioned to survive the current
downturn with positive earnings and cash flow expected. In addition,
we believe that they each may be within 15% of their respective
bottoms, and that a long-term, multi-year investment could yield
50-100% returns (not annualized) and potentially outperform the broad
market averages.
Homestake and Prime cancel their agreement with Inmet to buy Troilus.
Homestake Canada (wholly owned by Homestake Mining) and Prime
Resources (50.6% owned by Homestake Canada) announced that they would
terminate their agreement with Inmet to purchase the Troilus
gold/copper mine for US$110.0M. Homestake and Prime said that their
termination was based on an alleged failure by Inmet to disclose
certain historic assaying and operating information regarding the
Troilus mine. Inmet denies that any undisclosed information is
material in the context of the proposed transaction. As such, Inmet
has not accepted the termination of the agreement, which was scheduled
to close on December 16, 1997.
The main issue appears to be that Homestake assayed core splits from
four exploration drill holes in the Troilus ore body that, on average,
were lower than the results used by Inmet in the calculation of ore
reserves. During the course of defining the Troilus deposit, Inmet
used results from 429 holes and assayed approximately 54,000 samples,
while undertaking a number of programs to test the validity of its
assay database. As such, Inmet is standing behind its findings and
has retained Strathcona Mineral Services to organize and conduct a
program to investigate the inconsistency of the assay results. This
situation could take several months to unfold. If this transaction
proceeds according to the original agreement, we estimate it would be
mildly accretive to cash flow, but negative to earnings for both
Homestake and Prime at gold prices below US$300/oz. If the
transaction does not proceed, it would result in a setback for Inmet
in its asset sales strategy that was embarked upon to obtain the funds
necessary to develop the large copper-zinc Antimina joint-venture
project with Rio Algom. A final decision on Antimina is scheduled to
be given to the Peruvian government in September 1998.
Timeframes on when to decide the outcome of Las Cristinas are called
into question.
In previous reports, we had said that a decision by the Venezuelan
Supreme Court on whether to hear Invesora Mael's (Crystallex) case
regarding its ownership rights to Las Cristinas would occur on or
before December 15, and on Friday, we had said that this would be
delayed until January, at the earliest. In both cases, we apparently
were wrong. On Friday, our information was derived from a Bloomberg
report suggesting that the decision would be given in January, at the
earliest. According to Placer Dome, it has never received a date on
when a decision regarding Las Cristinas would be reached. This
includes an October date bandied about earlier this year, the December
15 date, and the recent announcement tied to the Bloomberg report. We
believe that if a date was set, Placer would know. We continue to
believe that Placer and CVG will, and should, retain ownership rights
to Las Cristinas.
Short covering could give temporary respite to gold ahead of holidays.
Short covering in gold ahead of the holiday season is a distinct
possibility. Traders have historically not wanted to go on holiday
with a large position, and since the speculative short position in
gold is a whopping 71,170 contracts (there are also 10,682 longs),
short covering could lift gold by US$10-15/oz. in coming days. If
this happens, we would not view it as the beginning of a new rally in
gold, unless of course there was additional news to justify the move.
In other news, inflation remains subdued as the latest key indicator,
the November US PPI, fell by 0.2%.
Avoid shorting silver.
Once the holiday has arrived, large specs may try to manipulate
virtually any of the commodities (since volumes are generally low) by
either buying or selling large numbers of contracts in an attempt to
trigger stop orders. The market that seems to be most susceptible is
silver, in which a syndicate currently appears to be attempting to
corner the market and drive prices higher. This syndicate has a good
chance in the next few months of being successful, and we would
caution against being short silver. In the longer term, the higher
silver goes, the more likely it would be for scrap metal to send
prices lower (from higher prices) once again. Remember, mined silver
does not disappear, and there is a long history of silver mining.
Larry Strauss (416) 869-3092 |
