Gold: $1,270/oz and rising
• Evidence of Central Bank gold purchases
• The market views central banks as potentially becoming net buyers of gold this year.
• Central banks have sold 442t of gold per year on average over the past decade according to GFMS (FT).
• The withdrawal of substantial central bank gold sales appears to be having a marked impact on gold prices.
• It is not possible for gold producers to raise production to meet such a shortfall in metal available to the market.
• ETF funds, some of which are physically backed, may become new sources of supply if gold prices rise sufficiently to cause investors to sell their ETF holdings. Gold investment is generally seen as ‘sticky’ eg investors are largely reluctant to sell gold which is seen as an investment of last resort.
• A sharp and dramatic gold price spike may be required to loosen ETF stocks to meet the forecast shortfall.
• Gold prices look set to continue to rise in the run up to the Hindu festival of Diwali on 5th November and towards Christmas. The Chinese new year in February 3rd is also seen as important for gold buying.
• Gold prices appear to have broken through some important technical resistance levels and look poised to break through $1,300/oz relatively quickly. The price rise should take out any short sellers in the market. A spike over $1,500/oz may be needed to loosen sufficient gold to return the market towards balance by the end of this year.
Key gold stocks: Petropavlovsk, Medusa Mining*, Ampella Mining*+, Shanta Gold*, Oxus Gold*, Solomon Gold*, Hambledon Mining*, Carbine Resources*+
* Fairfax acts as UK agent, nomad and broker to marked stocks
Japan – The government has announced its first currency intervention to weaken the yen since 2004 after a surge in the currency to the strongest level against the dollar in 15 years threatened to stunt the nation’s economic recovery. The Japanese acted alone without Central Banks from other major economies joining the sell, leading to speculation that their efforts might proven to be in vain as a result of a lack of global cohesion. The intervention came a day after Prime Minister Naoto Kan held onto power after fending off a challenge from Ichiro Ozawa.
• Estimates suggest that the authorities' yen sales were worth around Y200 billion to Y300 billion.
US – Figures released yesterday showed that retail sales figures rose more than expected in August. Purchases increased 0.4% following a 0.3% gain in July.
• Auto sales fell 0.7% at dealerships.
• Industrial production report will be released later today with forecasts suggesting that figures will show a fall in output after a surge last month.
China – The Ministry of Commerce has announced that direct foreign investment in China climbed for the 13th straight month in August in contrast to claims from the US and Europe that the business environment for foreign companies is declining.
Germany – Investor confidence fell more than forecast to a 19 month low as budget cuts across the region hit moral. The ZEW Centre for European Economic Research in Mannheim said its index of investor and analyst expectations which aims to predict developments six months ahead, dropped to minus 4.3 from 14 in August. The figures suggest that growth will slow over the next six months.
Australia – Business confidence jumped in August to the highest level in 4 months. The confidence index rose to 11 points from 2 points in July suggesting the hiring levels will continue to improve in the second half.
UK - UK Consumer Prices Index (CPI) inflation remained unchanged in August at unexpectedly exceeding the government’s 3% limit for a sixth month. Cereals and bread were the main drivers with wheat being 60% more expensive than a year ago.
Greece – Stronger than expected demand greeted the second sale of 6 month bills since the European Union bailout in May. Greece sold 1.17billion euros as investors covered the offering 4.5 times over.
• The Greek PM George Papndreou said in a speech earlier in the week that deficit reduction efforts were progressing so well that no further austerity measures would be required.
Philippines - Benjamin Romualdez, President of the Chamber of Mines in the Philippines has announced that Chinese companies are interested in 11 mining projects worth $600 million in the South East Asian country. No further details were given.
Peru – Union leaders have stated that Peruvian miners may vote to strike later this week, on a national level, to pressure for better pensions and a greater share of company profits. Workers in Peru and Chile have held stoppages at copper, gold and zinc mines this year to seek a bigger slice of company earnings as metals prices surge
Cameroon – Sundance Resources and China Harbour Engineering have signed an agreement to investigate and develop plans for a bulk materials port in Cameroon to service the increasing Iron ore mining activity in the region.
Currency –The Yen weakened against the dollar on the back of the Japanese intervention. The announcement of the intervention also sent the Australian and New Zealand dollars higher against the Yen. The Euro has moved sideways against the dollar in early trading today.
US$1.299/eur vs $1.289/eur last week. Yen85.40/$ vs 83.26/$ SAr7.08/$ vs 7.13/$ $1.551GBP vs 1.539/GBP
Gold US$1,270/oz vs US$1,253/oz – Prices hit a record yesterday as the dollar weakened and forecasts from the GFMS suggested that central banks would be net buyers this year for the first time since 1988. Over the last decade central banks have sold on average 442 tonnes of gold per year. As a shortage of supply in the market now looks likely to continue, prices look likely to climb further.
• SPDR gold holdings rises to 1,298.70 (41,754moz) from 1,292.62 (41.558moz) yesterday Current value US$52,830bn.
Silver US$20.49/oz vs US$20.37/oz yesterday – Prices hit a two year high yesterday as investor confidence grew in silver as a value store and positive retail sales figures for the US.
Palladium US$550/oz vs US$521/oz yesterday –
Rhodium US$2,125/oz vs US$2,125/oz yesterday
Platinum US$1,590/oz vs US$1,570/oz yesterday –
Copper US$7,593/t vs US$7,626/t yesterday – Prices fell in afternoon trading yesterday as the market digested the confidence data coming out of Germany and fears about prolonged demand returned. Prices have fallen further today on renewed concerns that China may introduce further measures to curb the property market sooner rather than later.
Lead US$2,229/t vs US$2,244t yesterday –
Tin US$22,650/t vs US$22,299/t yesterday –
Zinc US$2,136/t vs US$2,157/t yesterday –
Aluminium US$2,138/t vs US$2,134/t yesterday –
Nickel US$23,178/t vsUS$23,048/t yesterday -
Oil US$78.93/bbl vs US$79.24/bbl – OPEC has announced that it is comfortable with the oil price remaining within the $70-$80 range increasing the belief that the organisation it will not change official production levels.
• BP has come under further scrutiny over safety concerns at operations in the North Sea. All but one of BP’s five North Sea installations were cited for failure to comply with emergency regulations on oil spills after inspections in 2009.
Gas US$3.950/MMBTU vs US$3.941/MMBTU yesterday – 3 storms being tacked over the Atlantic and Caribbean may strengthen and force closure at a number of Mexican oil and gas platforms.
• Recent reports suggest that Indonesia may become the largest producer of unconventional gas in the region with production potentially hitting 900 million cubic feet a day by 2020.
Coal – Northern Coal Fields, one of India’s biggest producers has stated that India will nearly triple coal imports to circa 250mt per annum by 2020. Current import levels are between 80-100mt per annum. India is planning to increase power generation capacity by 100 000 MW over the next ten years, mainly by building coal-fired plants according to industry experts.
Steel – Continued power restriction are set to impact steel production in China throughout the rest of the year according the Ministry of Industry and Information Technology. Power restrictions in China may trim steel supply in the nation by 9.6% for the rest of the year
Antimony – Base metals are not the only metals affected by the power restrictions being rolled out throughout China. Antimony, the metal used for fireproofing items and in microelectronics and which China produces 90% of the world’s output has soared on the back of the restrictions. Prices have risen nearly touching $11,000 a tonne a 150% increase since January 2009.
Shanta Gold* (LSE:SHG)– Drilling at the ‘New Luika Gold Mine’ report significant gold grades
• Drill results from the Luika and Luika South zones at the Chunya gold project are showing significant gold grades over meaningful widths.
• Drilling at Luika and Luika South appears to extend the gold resource by a further 150m at Luika and 500m at Luika South. Significant gold grades are evident within both mineralised extensions and this could add significantly to the current 642,716oz JORC gold resource.
• Grades report relatively close to surface indicating open pit potential for these extensions and adding confidence to our modelling of this new mine.
• It is difficult to make a guess on how much this might add to the JORC gold resource but the extensions appear to add significant mineralised potential to the ‘New Luika Gold Mine’ at Chunya.
• Shanta is reported in the Tanzanian press to be starting earthworks at the Chunya gold mine in Tanzania in Q4 2010.
• The ‘New Luika Gold Mine’ is to be developed at Chunya over a potential 6km strike length as exploration has doubled the known strike of the mineralisation this year.
• First gold production due Q4 2011 within nine months of starting mining at site.
• Valuation: the results appear to add value to the new mine plan causing us to lower our discount applied to the mine valuation and raise our valuation to 55p/s from 49p today.
Conclusion: The drill results are a very pleasant surprise for the team and support the decision to press ahead with development of the ‘New Luika Gold Mine’ in Tanzania. Further drilling and ongoing work at the site could provide further support and upgrade to the JORC resource in time.
*Fairfax acted as placing agent to Ampella Mining in the recent issue of 21.5m shares at A$1.95c/s
Mwana Africa (LSE:MWA)– AGM highlights progress at Freda Rebecca and potential for BNC
• Freda Rebecca: higher grade underground ore should reduce costs to economic levels. New machinery to also raise the production and proportion of this ore processed should help further. The mine has disappointed us with high costs and it sounds like the situation should improve. The mills are now running close to the 50,000tpm target which should again lower costs on a per ounce basis. Recovery rates have risen to over 80% again lowering the per ounce cost of gold production and should enable gold production of around 25,000oz pa. Phase 2 expansion is now being prepared with IDC loan drawdown
• Bindura Nickel Corporation: finance options being worked through. Loan funds for a substantial portion of the funding are said to be available probably as part of an offtake agreement. Work has started at the Trojan nickel mine at the smelter site.
• Zani Kodo: no further update since 98% increase in JORC resource to 1.25moz and ongoing drilling of the new new Kodo South discovery.
Ampella Mining*+ (LSE:AMX)– Near surface grades at Konkera highlight open pit value
• Ampella continue to report strong gold grades over significant intervals in near surface drilling.
• The consistency of the grades being presented gives a good indication of the potential value of the Konkera project where the JORC gold resource is expected to approximately double to around 2.4moz early next year.
• Konkera is around 5km in length with the latest drilling appearing to confirm mineralisation over the northern 2km of the project.
• A number of drill holes ended in mineralisation and will be re-entered to determine the depth of mineralisation in these holes.
• The holes drilled are relatively shallow by most standards but are showing mineralisation from surface and near surface to up to 102m down hole, eg along the length of the drill hole. Some deeper drilling to 200m is to be undertaken to show if mineralisation continues to greater depth. We know it extends beyond the end of at least four drill holes from the current drilling and the deeper drill holes should indicate if a larger deeper drilling campaign should be started. Our guess is that management will drill more deeper holes to multiply the JORC resource in time.
• A further 80,000 of drilling and 35,000 m of auger geochem is planned. This will keep the local assay labs busy for some time and will give the resource specialists plenty to work with.
• Konkera is rapidly becoming a major discovery and may begin to show potential beyond our current 2.4moz forecast.
• Today’s press release shows a series of maps and details of the latest drilling results. See attached file.
Conclusion: While the shares look well valued at current price levels, investors should look forward to further important updates. Konkera and other prospects at Batie West are offering significant potential upside and the potential for multi-million ounce discovery. It is rare to find such consistency in near-surface drilling and with relatively good gold grades over such intervals within the drilling. We see Ampella as offering potential to double its value over the next 18 months as the economic value of Konkera becomes evident.
*Fairfax acted as placing agent to Ampella Mining in the recent issue of 21.5m shares at A$1.95c/s
+ Some Fairfax employees own shares in Ampella Mining
Mining this week:
Patagonia Gold (LSE:PGD)– Cap-Oest South East gold silver prospect defines 60-70koz
Solomon Gold* (LSE:SOLG)– High moly, gold and copper grades seen in Drilling at Fauro
Serverstal Gold, raises its stake in Crew Gold