2016 Fearless Gold Sector Forecast : Stay The Hell Away

Build Your Gold Watch List – but keep your portfolio in other sectors :

This past year was one of the worst ever for large mining companies, which suffered because of falling commodity prices and high leverage. They needed cash badly, and the streaming companies were more than happy to provide it. Mining giants such as Barrick Gold Corp., Glencore Plc, Teck Resources Ltd. and Vale SA all sold streams in 2015.

For junior or producing gold companies and their investors, the range of forecasts and continued volatility suggest it’s wiser to ignore the crystal balls for now and instead focus on what companies can control, like ensuring a sound business plan, keeping their balance sheets strong, monitoring costs, and building value for their shareholders.

Trends are against gold:

1) no inflation can be detected

2) rising interest rates offer a money making alternative while we watch and wait

3) global unrest in the middle East, Africa and Ukraine continue unabated but don’t move the panic button to ” buy”

4) Peter Schiff continues to see gold at $5,000  ( our best contrarian indicator )

This is the time of year when analysts roll out their economic forecasts for the New Year. For those who keep a close eye on gold prices, this can be a painful process.

It’s been another tough 12 months for the yellow metal, with prices falling for the third consecutive year — down about 10 per cent in 2015 alone. Prices touched a high in the neighbourhood of $1,300 and, as the year drew to close, they neared six-year lows around $1050.

That’s a big dive from the heady days of 2011, when gold hit over $1,900 an ounce.

What made things even more difficult for the sector in 2015 was the price volatility. Just when it appeared prices might be on a firm trajectory upward, they would then fall, creating more uncertainty among everyone from investors to gold companies.

That volatility is making it harder for prognosticators to estimate 2016 prices with any certainty. It’s the proverbial attempt to nail Jell-O to a wall.

That doesn’t prevent them from trying. But the resounding lack of consensus suggests it is a fraught exercise. Some are breathlessly proclaiming we’re on the brink of a new gold bull market. On the flip side, Goldman Sachs and JP Morgan predict it will fall to the psychologically important $1,000 US-per-ounce level — or lower — in 2016. Bank of America Merrill Lynch believes it will average $950 an ounce in early 2016 before recovering. Slightly more optimistic forecasters, like HSBC, predict gold will average $1,205 next year.

Gold is different from other metals in that its prices are not driven largely by typical supply and demand. While the prices of other metals, like copper or silver, tend to rise and fall as economies grow and shrink, a lot of different forces affect gold’s price. It’s used as a store of wealth, unlike most other metals (you don’t store copper to get rich), and it’s considered a “safe haven” — used as a hedge against political and economic uncertainty.

Inflation and the U.S. dollar are two major forces behind gold’s prices. In 2015, they didn’t work in gold’s favour. The collapse of the price of oil has kept inflation in check, which is bad for gold because of its role as a hedge against rising prices. The U.S. dollar has been strong — another blow for gold, which performs contrary to the greenback. Some say one of the reasons for the strong dollar was ongoing speculation that the U.S. Federal Reserve would raise rates for the first time in almost a decade. The Fed did that on Dec. 16, but there was minimal impact on gold due to the central bank’s dovish approach of a gradual tightening of future rates.

 

The dark side of metal streaming deals: Strapped mining companies trade future value for cash ( Financial Post )

 

In September, Robert Quartermain did something highly unusual for a mining executive — he signed a streaming deal with an early exit strategy.

Precious metal streaming companies looking to team up to tackle bigger deals

Valerian Mazataud/Bloomberg

Overwhelmed by the sheer volume of opportunities available in volatile commodity markets, precious-metal “streaming” companies are looking to team up to take on large acquisitions that they might not be able to readily afford on their own.

Continue reading.
Quartermain, the CEO of Vancouver-based Pretium Resources Inc., was alarmed at how much value miners are giving away in gold and silver stream sales, in which future output is sold at below-market prices in exchange for an instant cash infusion.

So when he sold a US$150-million stream on Pretium’s Brucejack project in British Columbia, he insisted that the deal include buyback options for Pretium in 2018 and 2019, and that it cap the number of gold and silver ounces that can be sold.

“When you start putting in higher levels of streaming, and the stream lasts forever, then the potential upside starts going to streaming holders and (away from) your existing shareholders,” Quartermain said in an interview.

This will go down as the biggest year ever for metal streaming deals, and it’s not even close. Miners have raised US$4.2 billion from 11 stream sales in 2015, according to Financial Post data. That is nearly double the US$2.2 billion raised in 2013, which is the second biggest year on record.

For the most part, mining analysts and investors have cheered these deals. But their sheer number has caused alarm for some observers, who worry that miners are giving away vast amounts of future upside once metal prices improve.

The metal streaming business was created back in 2004. In these transactions, a streaming company like Silver Wheaton Corp. gives a mining company an upfront cash payment. In return, it gets the right to buy a fixed amount of precious metals production from the miner at a fixed price that is far below the market price. The streamer can then sell the metal for a profit. The biggest players in this business are Silver Wheaton, Franco-Nevada Corp. and Royal Gold Inc.

This past year was one of the worst ever for large mining companies, which suffered because of falling commodity prices and high leverage. They needed cash badly, and the streaming companies were more than happy to provide it. Mining giants such as Barrick Gold Corp., Glencore Plc, Teck Resources Ltd. and Vale SA all sold streams in 2015.
On the surface, these deals made a lot of sense for mining companies. Their stock prices are so depressed that they do not want to even think about issuing equity. And the last thing this sector needs is to take on more debt. So they sold future metal production instead.

“When companies are between a rock and a hard place, they often sell what’s good because they can’t sell what’s bad,” said John Tumazos, an independent analyst.

The problem is that streams destroy much of the future “option value” for mining companies. Since the streaming metal is typically sold at fixed prices far below the market price, the streamers get all the benefit when market prices go up.

To take an extreme example, Silver Wheaton was buying silver from some mining companies at less than US$4 a pound in 2011, when silver prices rose to almost US$50. It was a massive transfer of wealth from mining companies to a streaming company.

Another concern is that streams can eliminate the exploration upside from a mine. If a miner has agreed to sell a fixed percentage of gold or silver production from a mine to a streamer, it will have to sell more metal if it makes a new discovery on the property and boosts production.

When companies are between a rock and a hard place, they often sell what’s good because they can’t sell what’s bad
John Ing, president and gold analyst at Maison Placements Canada, said streaming is reminiscent of hedging, in which metal is sold in fixed-price contracts. Hedging was all the rage in the gold industry in the 1990s, when prices were low. But it became a massive liability once prices rose far above the value in the contracts. Barrick had to spend more than $5 billion to unwind its hedge book in 2009.

Eventually, hedging became a toxic word in the industry. It is almost nonexistent today.

“It wasn’t until the price of gold went up that everybody realized what Barrick was leaving on the table,” Ing said.

“The same thing is going to happen (to streaming) when the price of gold goes up again. Not until then will people focus on the dark side of the streams.”

For investors that don’t like streaming, the good news is that miners are starting to preserve more upside for themselves in these transactions.

For example, Barrick struck a US$610-million stream sale with Royal Gold last August that guarantees higher sale prices down the road. For the first 550,000 gold ounces and 23.1 million silver ounces that Barrick delivers to Royal Gold, it receives 30 per cent of the prevailing spot prices. For every ounce after that, it receives 60 per cent of the spot prices. So if silver prices go up, Barrick stands to benefit.
Pretium Resources Inc.

Pretium’s Brucejack project in British Columbia.
Pretium went even further by negotiating optional buybacks of its stream and capping the total amount of gold and silver to be sold. If Pretium discovers more metal at the Brucejack project, it won’t go into the stream.

Traditional streaming companies like Silver Wheaton and Royal Gold are looking to buy streams that will last for decades, so Pretium’s deal is not for them. Instead, Pretium sold the stream to two private equity firms, Orion Resource Partners and Blackstone Group.

These companies are just looking for a good return and are not bothered by the idea of having their stream re-purchased in a few years. That is a relatively new concept in streaming, and it could be a game-changer if more private equity firms and other players decide to compete with traditional streamers.

Quartermain said his deal is proof that miners have alternatives to conventional streaming. He hopes other companies will follow Pretium’s lead and try to maintain some upside in these deals.

“We’ve shown you can, even in challenging markets, finance good projects and achieve that upside for shareholders,” he said.

 

 

Product DetailsWhere can you find a gold watch list ?

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Product Details

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Financial Planning 2016 – because you waited too long for Tax Haven Planning In 2015

The  Steps to  Your Offshore Success  :What Is Your Tax Plan for 2016

 

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GOLDMAN: These Stocks Equal Great Buys

Wynn Resorts

Wynn Resorts

Thomson Reuters

Ticker: WYNN

Sector: Consumer Discretionary

Dispersion Score: 5.6

Upside to Price Target: 89%

Executive Comment: “We enjoy a segment of the market that we wanted to continue to enjoy, the upper premium, the VIP business and the top end of the mass marketing. We enjoy that advantage today and we intended to increase that advantage by the opening of Wynn Palace, such worthy assumptions of its creation, and I’m happy to say that that was the result of the construction and the development,” said CEO Steve Wynn.

UPDATE : Sept 23

Wynn Resorts (WYNN) Stock Falls on Fitch Ratings’ Lower Macau Gaming Revenue Forecast

NEW YORK (TheStreet) — Shares of Wynn Resorts were falling by 3% to $62.01 on Wednesday morning, after Fitch Ratings revised its Macau gaming growth forecast for 2015.

The statistical ratings firm said it now expects Macau gaming revenue to decline between 33% and 34% in 2015, down from its previous forecast of a 29% decline.

Fitch Ratings said that gaming revenues in Macau are down 36.5% year to date through August, which reflects on the difficult first-half 2014 comparison, and pressures such as a corruption crackdown in China that took a toll on gaming.

The ratings firm said that Macau’s decision to loosen its visa restrictions “should produce some positive benefit, underscoring that Macau is willing to use certain levers to prop up its gaming-centric economy.”

Fitch Ratings said it expects Macau gaming growth in 2016 to be “relatively flat,” citing the positive impact of new properties opening in the region next year.

The lower 2015 Macau gaming revenue forecast helped bring down shares of casino operators with properties in the region, including Wynn Resorts.

Separately, TheStreet Ratings team rates WYNN RESORTS LTD as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

“We rate WYNN RESORTS LTD (WYNN) a HOLD. The primary factors that have impacted our rating are mixed — some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. Among the primary strengths of the company is its expanding profit margins over time. At the same time, however, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and weak operating cash flow.”

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • 37.14% is the gross profit margin for WYNN RESORTS LTD which we consider to be strong. Regardless of WYNN’s high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 5.42% trails the industry average.
  • WYNN, with its decline in revenue, underperformed when compared the industry average of 4.0%. Since the same quarter one year prior, revenues fell by 26.3%. Weakness in the company’s revenue seems to have hurt the bottom line, decreasing earnings per share.
  • WYNN RESORTS LTD has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. Stable earnings per share over the past year indicate the company has managed its earnings and share float. We anticipate this stability to falter in the coming year and, in turn, the company to deliver lower earnings per share than prior full year. During the past fiscal year, WYNN RESORTS LTD’s EPS of $7.17 remained unchanged from the prior years’ EPS of $7.17. For the next year, the market is expecting a contraction of 54.4% in earnings ($3.27 versus $7.17).
  • Despite any intermediate fluctuations, we have only bad news to report on this stock’s performance over the last year: it has tumbled by 60.15%, worse than the S&P 500’s performance. Consistent with the plunge in the stock price, the company’s earnings per share are down 72.00% compared to the year-earlier quarter. Despite the heavy decline in its share price, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry.
  • Net operating cash flow has decreased to $201.34 million or 45.41% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm’s growth is significantly lower.
  • You can view the full analysis from the report here: WYNN

Viacom Inc.

Viacom Inc.

REUTERS/Lucas Jackson

Ticker: VIAB

Sector: Consumer Discretionary

Dispersion Score: 3.3

Upside to Price Target: 52%

Executive Comment: “Viacom is seizing every opportunity. Many of our brands speak to the younger audiences that are at the leading edge of the evolution of media. This has always proven to be an advantage over the years and will again as we accelerate our investment in initiatives, platforms and content. We continue to do the hard work to confidently move forward and lead our industry through the latest pivot,” said CEO Philippe Dauman

Dollar Tree Inc.

Dollar Tree Inc.

@BrianSozzi

Ticker: DLTR

Sector: Consumer Discretionary

Dispersion Score: 2.1

Upside to Price Target: 44%

Executive Comment: “Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budget. We serve a very loyal and growing customer base. Our commitment is to continue serving our existing customers better while taking every opportunity to gain new customers in every store every day,” said CEO Bob Sasser.

United Continental Holdings

United Continental Holdings

Getty Images/Scott Olson

Ticker: UAL

Sector: Industrials

Dispersion Score: 3.9

Upside to Price Target: 35%

Executive Comment: “The second quarter was a very good quarter for United and I am proud of the work our employees have done to deliver record earnings which benefit all our constituencies, including our employees themselves. We have a great deal of confidence in our future as we work to make United the carrier of choice,” said CEO Jeff Smisek.

Urban Outfitters

Urban Outfitters

Flickr/Mike Mozart

Ticker: URBN

Sector: Consumer Discretionary

Dispersion Score: 3.5

Upside to Price Target: 34%

Executive Comment: “All brands have carefully, but steadily, offered larger, non-redundant product assortments across a number of categories and, in several cases, have added entirely new categories. At the same time we are launching initiatives to make very important operational improvements, like better category distortion in stores, faster reaction to customer demand, more efficient use of store space, and better integration of technology,” said CEO Richard Hayne.

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