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.

 

 

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Banks’ Glencore Exposure Is a $100 Billion `Gorilla,’ : BofA

Glencore has $35 billion in bonds, $9 billion in bank borrowings, $8 billion in available drawings and $1 billion in secured borrowings, in addition to $50 billion in committed credit lines, against which it draws letters of credit to finance trading, according to BofA.

  • Analysts say extra $50 billion credit lines must be considered
  • Regulators to scrutinize commodity exposure in stress tests

Global financial firms’ estimated $100 billion or more exposure to Glencore Plc may draw more scrutiny as regulatory stress tests approach after the commodity giant’s stock plunge this year, according to Bank of America Corp.

Bank shareholders and regulators may be concerned that Glencore’s debt and trade finance deals, of which a “significant majority” are unsecured, will reveal higher-than-expected risk and require more capital once the lenders are put through U.S. and U.K. stress tests, BofA analysts said Wednesday. Adding an estimated $50 billion of committed lines to the company’s own reported gross debt, the analysts say financial firms’ exposure may be three times larger than Glencore’s reported adjusted net debt of less than $30 billion.

“The banking industry may have significantly more exposure to Glencore than is generally appreciated in the market,” analysts including Alastair Ryan and Michael Helsby said in a note titled “The $100 Billion Gorilla In the Room.” The commodity-price bust and “stress in Glencore’s share price and debt spreads may spur a review by investors, supervisors and bank management,” while “bank shareholders may pressure managements to reduce exposures,” they said.

Loans to the industry have come under scrutiny as the price of oil, copper and other commodities fell to the lowest in 16 years amid weakening demand from China. Glencore, the Swiss producer and trader of commodities led by billionaire Ivan Glasenberg, has pledged to cut debt by $10 billion and revealed more detail about its financing to mollify investors. On Dec. 1, the Bank of England releases its second round of stress tests, in which it has pledged to examine U.K. banks’ commodities exposure.

Glencore spokesman Charles Watenphul declined to comment on the BofA report. Glasenberg told staff last week the company had $13.5 billion of available liquidity and the company “will emerge even stronger.”

Stress Tests

The shares climbed 6 percent to 124.8 pence at 1 p.m. in London and have almost doubled from their low on Sept. 28, when Investec Plc analysts wrote there may be little equity value in Glencore if low commodity prices persist. Trading was briefly halted due to volatility twice on Tuesday and the stock posted its biggest gain ever on Monday, though the stock is still down by more than 50 percent in 2015.

“Gross exposures will be considered by regulators in upcoming stress tests” as opposed to banks’ net exposure, which can be offset by hedging, BofA said. “Many banks may now be more carefully reviewing their exposure to the commodities complex.”

The analysts criticized the lack of disclosure from banks about their commodity lending, but predict a change in policy to calm fears. “We believe the numbers are big enough that banks will need to use third-quarter disclosure to alleviate what we believe will be building investor concerns,” Ryan and Helsby said.

Balance Sheet

On Tuesday, Glencore released a document explaining its financing, reiterating much information that was already public knowledge, in response to recent criticism of a trading business that some have labeled a “black box.” Glencore has argued that its secured trade-financing from banks is of a high quality and has a low rate of default.

“Losses on trade finance portfolios historically have been low,” the Paris-based International Chamber of Commerce said last year, citing a report from the Bank for International Settlements. “Moreover, given their short-term nature, banks have been able to quickly reduce their exposures in times of stress.”

Glencore has $35 billion in bonds, $9 billion in bank borrowings, $8 billion in available drawings and $1 billion in secured borrowings, in addition to $50 billion in committed credit lines, against which it draws letters of credit to finance trading, according to BofA. That compares with more than $90 billion in property, plant, equipment and inventories.

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More than 60 banks participated in Glencore’s $15.25 billion revolving credit facility raised in May, and the broad syndication of the debt means that credit issues “would not likely be existential for any individual bank,” Jack A. Bass said. His managed accounts held no Glencore shares or debt.

Standard Chartered Plc, which has also been battered by the commodity rout, has the greatest exposure to commodity traders among European banks with $1.9 billion of syndicated loans, including more than $1 billion of loans and credit lines to Trafigura Pte Ltd., Sanford C. Bernstein said Oct. 5. Credit Agricole AG has the largest exposure of any bank to Glencore at $841 million, followed by HSBC Holdings Plc with $658 million, analyst Chirantan Barua said.

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Glencore in Freefall

  • Shares of FTSE 100’s worst peformer plunged more than 30%
  • More substantial restructuring needed, Investec warns

Glencore Plc plunged as much as 31 percent, extending a rout that’s wiped more than $14 billion off its value this month and highlighting investor concerns that it’s not cutting its debt load quick enough.

Chief Executive Officer Ivan Glasenberg’s debt-reduction plan announced three weeks ago and the move to sell a stake in its agricultural business reported by Bloomberg on Friday has failed to stanch the bleeding. Investec Plc warned Monday that there was little value for shareholders should low raw-material prices persist.

“In the current climate, debt is fast becoming the most important consideration,”Hunter Hillcoat and Marc Elliott, analysts at Investec, wrote in a note to investors. “Glencore may have to undertake further restructuring.”

The slump on Monday was the most since the company’s initial public offering in 2011. The company has been forced to sell new stock and scrap its dividend as part of the $10 billion debt-reduction program as China’s economic slowdown hurt demand for commodities and sent prices slumping. Goldman Sachs Group Inc. said last week that Glencore’s recent steps to reduce debt and bolster its balance sheet are inadequate.

Glencore fell to a record low and was down 28 percent at 70.48 pence by 1:54 p.m. in London. The stock slumped more than 16 percent for the second time in a week and has declined 76 percent this year, the worst performance in the U.K.’s benchmark FTSE 100 Index.

Glencore’s 1.25 billion euros ($1.4 billion) of 1.25 percent bonds maturing March 2021 fell 7 cents on the euro to 74 cents, the lowest since the securities were issued in March, according to data compiled by Bloomberg. The cost of insuring Glencore’s debt against default rose 29 percent to 711 basis points on Monday, according to data provider CMA.

The company counts Qatar Holding LLC, CEO Glasenberg, Harris Associates LP and BlackRock Inc. among its biggest shareholders, according to data compiled by Bloomberg from filings.

The shares have been battered after investors retreated from commodities as China’s economy expands at the slowest pace since 1990. The Bloomberg Commodity Index last month reached the lowest in 16 years and the Bloomberg World Mining Index on Mondaylost as much as 2.5 percent to touch the lowest since 2008.

Glencore has hired Citigroup Inc. and Credit Suisse Group AG to sell a minority stake in its agricultural business, a person familiar with the situation said Friday. The sale is part of the debt-cutting program announced earlier this month that included selling $2.5 billion of new stock in an attempt to reduce the company’s debt to $20 billion from $30 billion.

That might not be enough, according to Investec.

Investec Warning

“The challenging environment for mining companies leads us to the question of how much value will be left for equity holders if commodity prices do not improve,” Investec said in a note. The bank warned that if major commodity prices remain at current levels, almost all of Glencore and Anglo American Plc’s equity value would evaporate in the absence of substantial restructuring.

Anglo American, owner of the world’s biggest platinum and diamond producers, dropped as much as 8.8 percent to a 15-year low in London.

Goldman Sachs said that should commodity prices fall another 5 percent, the metrics needed to maintain Glencore’s credit rating would be out of the required range.

Chinese Market

Billionaire Glasenberg has said no one can read the Chinese commodity market. The nation’s industrial profits dropped 8.8 percent last month, the most in at least four years, signaling weakening demand. The biggest consumer of commodities is struggling with excess capacity, sluggish investment and weaker manufacturing.

Moody’s Investors Service earlier this month cut its outlook to negative on Glencore and affirmed the company’s Baa2 debt rating. Standard & Poor’s has reduced its outlook on Glencore’s BBB level to negative, saying China’s slowing economy will continue to weigh on copper and aluminum prices, which are near six-year lows.

Mining Shares Lead Stock Losses

  • Cartoon of the Day: Falling Stocks - falling bull cartoon 10.13.2014
  • Copper, zinc, coal all tumble on deepening China concern
  • Credit Suisse lowers target prices for diversified miners

Mining shares including Glencore Plc led a slump in European equities as metals prices tumbled on fears that an economic slowdown in China, the world’s biggest consumer of raw materials, is deepening.

Glencore fell as much as 10 percent to a record 107 pence in London trading. Anglo American Plc, Antofagasta Plc and ArcelorMittal dropped more than 6 percent, dragging the regional benchmark Stoxx Europe 600 Index lower. KAZ Minerals Plc plunged almost 18 percent, the most since January, to a record low.

“Until China demand and emerging-market currencies find a floor, it will remain challenging to put an absolute floor on commodity prices,” Credit Suisse Group AG analysts led by Liam Fitzpatrick wrote in a note Tuesday.

The bank cut its price estimates for large diversified miners including Glencore and BHP Billiton Ltd., which said on Tuesday it’s planning to sell hybrid securities to help refinance near-term liabilities. Stainless steel producer Outokumpu Oyj sank as much as 16 percent after saying third-quarter delivery volumes may be 10 percent lower than the previous quarter.

Growth Cut

The Asian Development Bank reduced its growth forecasts for China and said the country’s declining appetite for energy, metals and other raw materials would hurt commodity-focused export economies like Mongolia and Indonesia. China is set to grow at its slowest pace in a quarter century this year even after five central bank interest-rate cuts and fiscal stimulus.

Copper declined 2.5 percent to $5,139 a metric ton. Zinc sank as much as 1.8 percent to $1,628 a ton, the lowest in five years. European coal for 2016 dropped below $50 a ton for the first time.

Glencore, which sells all three commodities, was down 8.7 percent at 108.60 pence by 11:02 a.m. in London trading, after earlier touching the lowest since it began trading in May 2011.

“Glencore is a bet on copper, and weakness in metal prices is sending tremors through Glencore’s shareholders,” said Richard Knights, a mining analyst at Liberum Capital in London.

Glencore to Sell as Much as $2.5 Billion Shares

 

  • Company will seek to cut debt by as much as $10.2 billion
  • Commodities producer and trader to suspend dividend payments

Glencore Plc, the commodity producer and trader, plans to sell assets and shares to cut its $30 billion net debt by about a third following the rout in global markets.

Baar, Switzerland-based Glencore, which last week posted its biggest weekly decline in London since going public in 2011, plans to sell about $2.5 billion in new shares and assets worth as much as $2 billion. It also will suspend dividend payments until further notice as it aims to reduce its net debt by about $10.2 billion, the company said Monday in a statement.

Glencore has lost more than half its market value this year, and along with BHP Billiton Ltd. and Rio Tinto Group has seen profits slump as commodity prices plunged to touch a 16-year low last month. Standard & Poor’s cut Glencore’s outlook to negative from stable last week, saying weaker growth in China will weigh on copper and aluminum prices.

The proposals are “designed to sensibly accelerate the deleveraging of our balance sheet, maximize future cash flow generation in the current weak commodity price environment and substantially improve our financial and credit metrics,” Chief Executive Officer Ivan Glasenberg and Chief Financial Officer Steve Kalmin said in the statement.

Morgan Stanley and Citigroup Inc. will underwrite 78 percent of the proposed share sale. Glasenberg and Kalmin and several board members will take up the remaining 22 percent. The company said it will save $1.6 billion from suspending its 2015 final dividend and a further $800 million from suspending its 2016 interim dividend.

Glencore’s net debt was $29.6 billion as of June 30, according to an Aug. 19 filing. It’s rated at BBB, the second-lowest investment grade, by S&P.