Dollar dominance, news from GSV and ICG, shame on Samarco
Happy Monday. Or not so happy, for anyone focused on gold.
It's been a tough couple weeks for the yellow metal and the pressure is not about to abate. Equities are facing double downside pressure: metal prices are sliding and tax loss selling is getting underway. The only solace there is that many portfolios are looking at bigger losses with oil and gas holdings than metals stocks, so energy equities will bear some of the tax loss selling burden.
The time to clean out some of your underperforming metals stocks was a few weeks ago, as I advised subscribers. Take the tax loss, consolidate some cash, and be ready to play the pending strong season.This week's Maven Weekly letter to subscribers will outline how I plan to profit in the next few months, as gold and mining moves from seasonal weakness to strength. If you are interested, click HERE and sign up for a free trial.
In last week's letter I discussed drill results from Gold Standard, Integra Gold's resource update, and BHP and Vale's abysmal response to the Samarco tailings dam failure, before talking through why the dollar's rise will keep on keeping on, holding gold down.
I also made a new investment recommendation that I like as a short-term trade: pending news flow and a promotion push look set to lift it perhaps 25% in the short term.
The recommendation is for subscribers only, but the rest is reproduced below. Hope you enjoy.
I wrote about them last week but they’ve made it worth my while to write about them again. Gold Standard Ventures (TSXV: GSV) added to the good drilling news from its Dark Star oxide gold deposit in Nevada with another solid hole: 157 metres grading 1.51 grams per tonne (g/t) gold.
Quick backstory: GSV has been exploring this property for years. It is home to three deposits: Dark Star and Pinion at the south end and North Bullion to the north. Dark Star and Pinion are oxide gold zones that host 1.8 million oz. gold, according to maiden estimates. North Bullion is a sulphide zone. A fourth zone, Bald Mountain, offers oxide gold but does not carry a defined resource as yet.
An 80-hole drill program is underway, designed to expand and upgrade the resource. Expansion now looks pretty darn likely.
The new ounces will come from the Dark Star structural corridor, a 6-km stretch extending north from the Dark Star deposit that shows continuous potential according to mapping, geophysics, and soil geochemistry. Hole 10, released last week, returned 149.4 metres of 1.38 g/t gold from 510 metres north of the defined resource. The new hole was cut 60 metres east and 10 metres north and intersected the zone at a shallower, updip level.
The gold occurs in the immediate footwall of a normal fault, which is a common pattern for gold mineralization on the Carlin trend. From these two holes, it looks like GSV has tapped into a new, blind oxide gold zone. Size is completely unknown – the company suggests there is 6 km of prospective trend to test but in the Carlin there is always a chance that a fault truncates or the zone eases off.
Gold Standard has all the permits it needs to continue drill testing this zone. The challenge will be winter. Dark Star is at 2,200 metres elevation and winter is very real around those parts, so Gold Standard will have to weigh the costs and complications of a winter drill program against the desire to keep testing this new zone.
Whatever they decide, the company is well funded. They expected to wrap up this drill program and end the year with $13.5 million on hand. The cash came from Oceanagold, which bought a 14.9% stake in GSV earlier this year and has continued to buy in the market.
GSV jumped $0.12 on the news and is now up 37% since releasing results from hole 10.
Integra Gold (TSXV: ICG) is the busiest explorer on the Venture exchange and the company just announced a new resource estimate for a zone its Lamaque project in Quebec. The calculation incorporates 27,815 metres of drilling and redraws the map of the Triange deposit.
Triangle is one of seven deposits within the Lamaque project, but it keeps grabbing more and more of Integra’s attention. It’s big and carries strong gold grades, but those are not the only factors at play. Lamaque would be an underground mine, as the historic Sigma and Lamaque mines on the property were for decades, and for that to work the gold also has to be mineable.
The new Triangle map moves the deposit closer to that goal. The gold-bearing structures at Triangle have been divided into two types, C and C Flat structures. The C structures are the new addition – and as wider, more steeply dipping zones, they could make Triangle amenable to long hole mining instead of the higher-cost room and pillar method assumed in the last PEA, when all the gold was thought to sit in the thinner, flatter C Flat structures.
Onto the numbers. Indicated resources climbed 21% to 627,810 oz., contained in 2.65 million tonnes grading 7.37 g/t gold. Inferred resources jumped 400% to 871,530 oz., contained in 3.93 million tonnes grading 6.89 g/t gold.The table below shows how important the C structures are within the overall resource.
The C and C Flats structures carry similar grades, but the wider, longer C structures offer far more tonnes. And the difference in dip is significant.
The more Integra learns about Triangle, the more it sees to the Sigma and Lamaque deposits that together produced 9 million oz. of gold from just a few kilometres away.
For instance, the bulk of the 4.5 million oz. produced at Sigma came from structures known as the “P shears”, which are identical to the C structures at Triangle in terms of orientation and in the fact that they extend beyond the intrusive host into the surrounding volcanics.
I mean it when I say Integra is busy. There are seven drill rigs turning at Lamaque; since the database was closed off in May those rigs have completed 17,000 metres of drilling on Triangle that is not included in the updated resource. Also not included were 43,435 metres of drilling testing the six other deposits at Lamaque, which will earn resource updates down the road.
Over the next half year Integra has a long To Do list. It will not only keep drilling but increase the pace, with an aim to complete 100,000 metres in 2016. It will update the Lamaque PEA incorporating this new resource and assessing the potential to change to lower-cost long hole mining. It will keep working towards getting underground to drill. And it will receive all the entries from the Gold Rush Challenge, the contest where $1 million in prize money is available to those who can turn the massive pile of historic data that came with the Lamaque and Sigma mines into new discovery targets. The results from that contest will be announced at PDAC in Toronto in late February.
The collapse of two tailings dams at the Samarco iron ore mine near Mariana, Brazil, made it abundantly clear that not all miners have gotten the message.
Six people are confirmed dead. Twenty-one are still missing, a week later. Farms and entire villages were destroyed.
Samarco is a 50-50 joint venture between BHP Billiton and Vale. BHP is the world’s largest miner; Vale is fifth. These industry stalwarts should be the flagbearers for responsible, socially responsive mining.
Why the dams collapsed is still unknown. Official statements to date describe a three-tiered tailings dam complex in which the first dam failed and the resulting flood overwhelmed the second dam. The third is still competent.
I am not saying BHP and Vale were negligent in designing or maintaining the tailings facility, because at this point we don’t know what happened. What I am saying is that the companies’ immediate responses were disgusting.
Both denied responsibility, blaming management at their joint venture company Samarco.
“Samarco has a management team that’s completely independent from its shareholders and responsible for technical and financial matters,” Vale said. “Vale really doesn’t have any responsibility for the occurrence of the unfortunate and sad accident.”
“It is important to be clear that Samarco is the operator of the joint venture and, as a separate corporate entity, is responsible for the entirety of its operations,” said BHP.
I get it – they’re trying to protect their bank accounts, which they’re supposed to do for their shareholders. But grab a tiny bit of perspective.
First, it is likely that 27 people died and many, many more saw their homes and livelihoods destroyed.
Second, the general population hates mining as it is. Sidestepping obvious responsibility for a fatal disaster makes that worse. And social perceptions matter. Every time a mine goes through permitting, perceptions matter. And every investor who turns away from mining out of distain for how the industry operates weakens an already limited support base.
Today the CEOs of Vale and BHP finally toured the site, made mournful statements about the devastation, and pledged to support an emergency fund for rebuilding.
Too little, too late.
Gold has been getting hit (how’s that for an understatement?). The spot price has closed down 15 of the last 19 days, cutting the price by more than US$100 per oz. Miners have felt the pain; the GDX is down 19% since Oct. 19th. Explorers have been hurt some, but they are so downtrodden that the effect is muted.
The near-term outlook for gold was weak when I wrote last week and it has weakened since. A much stronger than expected US jobs report released on Friday has put a December rate hike firmly back on the table. As I’ve said, a 0.25% interest rate increase does not actually matter in terms of debt servicing costs, but it does matter in terms of mentality.
For evidence, look no further than the dollar.
Following the Fed’s September decision to leave rates at zero, the dollar drifted sideways and then down. That helped gold gain 7% between mid-September and mid-October. Then the EU started talking about additional quantitative easing, the Bank of Japan made similar noises, and China cut interest rates again. The greenback regained its gleam against the rest of the world’s more tarnished currencies and climbed 5.6% in a little over two weeks, the late-stage jump from 96 to 99 fueled by the addition of that strong jobs report.
With a rate hike likely in a month, the dollar will remain strong. That isn’t good for gold. Neither is this time of year, seasonally weak for the yellow metal. Tax loss selling is another factor that will play against weak gold equities. All told, not a great outlook from here.
That being said, gold may actually rise following a rate hike. The increase is already priced in and removing rate uncertainty should alleviate some of the pressure bearing down on gold.
The other silver lining is that January is the start of gold’s strong season and if gold manages to define a new multiyear low before then perhaps all the chartists who keep predicting such will quiet down. And gold will get a chance to move up properly.
BTW - I really enjoy reading your newsletter - very comprehensive and you do an excellent job of integrating a macro perspective into your analysis.
Once again, it's great to hear your pearls of wisdom in the mining sector that translate into income and profits. Now that we are in the nascent stage of this commodities bull market, everything that the retail investor can learn in order to maximize profits is education today that will be worth a fortune tomorrow.