Cheap Oil Good, Guatemala Bad, and Other Happenings
There is so much analysis out there that, the more one researches, the more confusing it can become. And just when you've got one aspect sorted – like the fact that gold bottomed on Nov. 5th – another seismic shift, like a tanking oil price, throws everything else around.
That's why it's good to get away from my computer and my usual group of gurus and get a wider swath of opinion. And a swath of opinions is definitely what you get when you linger near the bar at a mining sector Christmas party.
The US recovery is real, the dollar is climbing, and that will hurt gold. No – the recovery is shaky and the end of the shale boom will derail it, hurting the dollar and helping gold. (I think both arguments miss more important pro-gold points about currency uncertainty, limited physical supply, and central bank buying, but everyone is entitled to an opinion.)
Copper is cheap and deficits are looming. What? Copper is overvalued and Chinese demand is sliding, so supplies are more than sufficient!
Uranium had its rally – stockpiles will keep it trading sideways for the next year. Pardon? Uranium is just getting started: utilities need to restock and Japan's restarts are imminent!
You get the idea: disagreement abounds. However, there were a few areas of consensus.
One is that cheap oil is good for miners, especially anyone operating a low grade, open pit mine.
Another is that miners in countries with currencies that have slid versus the US dollar are loving it. Canadian miners, for example, get to cover their costs in cheaper loonies while selling their gold or silver or diamonds in stronger greenbacks.
The third is that, even if debates persist over the precise bottom, stocks are seriously on sale. Long-term resource investors are still shelling out money for private placements because, as one broker friend put it, "When you can buy 40% of the company for $1 million and the asset is incredible, why wouldn't you?"
I'll have more to say on the benefits of cheap oil and devalued currencies for miners next week. For now, it's worth noting that the mining sector produced a fair bit of interesting news over the week. Gold's ascent was the most interesting aspect of all – I'm still right! – but I have ignored the rest of the sector of late, so I will hold off on gold for now.
Herewith: a quick roundup of the week.
Guatemala is doing its best to discourage explorers and miners. In early December the country's Congress moved to double mining royalties to 10%, suddenly and without consulting any foreign operators. Now President Otto Perez Molina has approved the new legislation.
There's no doubt Guatemala needs the revenues: the government spent US$7.85 billion last year but only brought in US$6.41 billion. The new emergency budget raises a raft of taxes to boost tax revenues to US$8.47 billion, with miners contributing notably.
Analysts and operators decried the increased taxes. Daniel Earle of TD Securities said the change positions Guatemala's royalty-tax combo as "among the most burdensome anywhere in the mining industry globally."
Tahoe Resources has the most at stake. The company's Escobal silver mine is only one year into operations and has the potential to become one of the largest silver mines in the world. BMO Capital Markets estimates the royalty increase cuts Tahoe's net present value by 11% using spot metal prices.
The taxation change also highlights a common disjoint: Tahoe had been supporting regional and community programs through voluntary royalty payments totaling some $7 million annually that will now likely be discontinued. Tahoe management has told various media outlets of their concern that the federal government is putting its revenue needs ahead of the needs of the seven communities impacted by the Escobal mine.
Pilot Gold returned arguably the best drill results to date from Kinsley Mountain, a gold project in eastern Nevada.
Earlier this year Pilot discovered the high-grade Western Flank zone at Kinsley and recent results bode well for the new area's potential. Highlights include 10.1 grams gold over 39.6 metres, 6.05 grams gold over 30.5 metres, and 4.39 grams gold over 29.2 metres.
Pilot also probed the Racetrack zone, an area 1.2 km to the south, and one hole returned gold from both the near-surface Candland shale unit and the deeper Secret Canyon shale host. Proving the persistence of gold in both units along what is now more than 2 km of strike opens up the potential at Kinsley considerably.
Pilot's strength is geologic modeling prowess. This is the same team that, by identifying gold in previously untested geologic units, built a multimillion-ounce gold deposit at Long Canyon that attracted a $2.3-billion takeout by Newmont Mining. The logic at Kinsley is very similar.
Pilot will release an initial resource estimate for Kinsley in the new year. The company also plans to update resources and economics at its equally exciting projects in Turkey. Pilot has a lot of moving parts and 2015 looks set to be a big year.
Glencore thinks everyone else is wrong about copper.
In recent presentations the commodities trader has been saying forecasters are far too optimistic about copper supplies in 2015.
Copper is particularly susceptible to supply disruptions. Weather, power shortages, labour strife, and technical problems seem to regularly sideline copper operations. Perfect example: union workers are Peru's largest copper mine, Antamina, just went on strike to push for pay bonuses and other benefits.
On top of that, four years of declining copper prices have led to project deferrals, commissioning delays, and output reductions.
As we near the end of 2014 predictions of a small deficit this year are being confirmed. For 2015, however, the International Copper Study Group estimates a 390,000-tonne surplus.
Glencore disagrees. The trader sees too much optimism in many parts of the ICSG's forecasts. Its estimates put the market will encounter a 1.4 to 1.6 million tonne deficit next year.
Glencore does have much to gain from a higher copper price. The Swiss company relies on copper for 38% of its earnings, so it wouldn't mind a deficit at all.
Romarco Gold updated the economics of its Haile project feasibility study, which it originally completed in early 2011. The updated numbers look better than the originals, mostly because the company boosted the gold price from US$950 per oz. to US$1,250 per oz.
Resources, reserves, pit geometry, and recoveries all remained the same, as did basic plans to build a mine churning through 7,000 tonnes of ore daily bearing an average grade of 2.06 grams gold.
The project now carries an after-tax net present value of US$329 million and should generate a 20.1% after-tax internal rate of return. The Haile mine should be able to produce an ounce of gold at an all-in sustaining cost of US$625, net of silver credits.
Capital costs also climbed, however, reaching US$333 million.
Haile also got a permitting update: South Carolina's Board of Health and Environmental Control denied the Sierra Club's request to review the Haile operating permit. With that unexpected obstacle now cleared (and quickly), Romarco can focus on finding the rest of the funds to build this thing. The company already secured a $200-million loan but the rest of the requirement is outstanding.
Yamana Gold became the latest company to join the spin-off craze. The gold miner announced plans to transfer three non-core Brazilian mines into a new company called Brio Gold.
Brio will initially produce more than 130,000 oz. gold annually. That amount could rise if ongoing studies identify a way to improve recoveries at one of the mines, Santa Luz.
Brio will also hold Agua Rica, a large copper-molybdenum-gold-silver porphyry in Argentina. The deposit is near Alumbrera, the large copper-gold mine that has been operating since 1998 and is expected to run out of ore in 2019.
Yamana has studies options for Agua Rica and came up with two: integrate it with Alumbrera at a capital cost of US$2.2 billion or build it as a stand-alone mine for US$3.9 billion.
Now Brio gets to wrestle with that conundrum.
To start Brio will be a 100% owned subsidiary, but during 2015 Brio's management team will "evaluate various strategic alternatives" (i.e. decide when and how to list).
Probe Mines inked a deal to consolidate control of the Borden gold belt. For $25 million and 6 million shares Probe is getting 486 mineral claims in and around its Borden gold deposit in Ontario, including key claims within the High-Grade zone and a land package connecting Borden with the East Limb project 22 km to the east.
The expanded land package is truly district scale, stretching along 70 km of strike and covering 786 sq. km.
More importantly, now that it owns all the ground Probe can start really probing the High-Grade zone, where a wedge of uncontrolled land previously restricted exploration.
Even after paying for the lands Probe will still have roughly $15 million in the bank.
Taseko finally got to feel what it's like to get a mine permit.
After two failed attempts to permit its New Prosperity project in central British Columbia, Taseko went out and found itself a new project. Florence is a development-ready in-situ copper leaching project in Arizona.
Taseko got Florence by acquiring Hunter Dickinson sibling company Curis Resources, which struggled for four years to permit Florence in the face of opposition from local land speculators. The permitting battle was a painful reminder that unexpected opposition can truly stifle success.
Now the battle is over: the Environmental Protection Agency has issued a draft underground injection control permit, which is the last permit required to start building. Now starts a 60-day public comment period. I'm not sure how anyone at Taseko is going to get anything done over the next two months, since typing is pretty hard with all of one's fingers crossed.
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Your "Maven Letter" has totally blown me away! I was thinking one of your letters would be a 2 or maybe 3 page letter about one or two mining companies. Instead, each one is a detailed report. Bravo to you for such great detail.
I think Peter Krauth's analysis articles are second to none. It would be impossible to conduct a fuller report than those which I have read.