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Gold: $2011 in 2011


John Ing

The signs of rebellion are plain to see. Student demonstrations are getting bigger. Tens of thousands of workers protest. Libya, Yemen or Bahrain? No, Wisconsin, where fourteen Democrats fled the state to avoid a quorum vote in a showdown that saw legislators pass a bill restricting labour’s bargaining powers. Protestors are calling for boycotts as dozens of cash strapped states look for ways to balance their books, changing the dynamics between the public sector and governments. Nor is it a good period for dictators with the retirement of Mubarak, arrest of Baby Doc and embattled Qaddafi.

And like the seventies, geopolitical tensions in the Middle East have triggered a spike in oil prices, where two thirds of the world’s proved oil reserves and almost half of its gas lie. The sea of youth-inspired protests threatens regional instability and energy supplies in an important part of the world. So far another domino has fallen and the contagion threatens to affect the entire Gulf including Saudi Arabia. How the growing turmoil sweeping the Middle East will play out is uncertain. Who will fill the vacuum? Will we see the worst scenario of another Iranian-like revolution? Or, will there to be a Somali-like result where every tribe with a gun rules their own fiefdom? To be sure, the wild card is that Middle East upheavals have a long history of driving oil prices higher. In the seventies, two oil embargoes pushed up oil prices, contributing to double digit inflation. Not surprisingly change is coming and we believe a shift in the power balance has taken place which will prove to be a tipping point with huge inflationary implications for the global economy.

The Biggest Debtor

Times were good. For much of last year, the Fed’s expansionary policies had a positive side effect pushing up stock prices and weakening the dollar which made US goods more competitive. And while Mr. Obama and his party was handed a mid-term “shellacking”, his pledge of bi-partisan co-operation gave way within weeks. Obama’s ever growing budget deficit means that the House will again face the heavy task of shrinking spending. Moreover after targeting the bankers, car companies and Wall Street’s fat cats, Mr. Obama focused his “politics of blame” on his fellow politicians. However, Obama’s eloquence is getting tired, and attempts to fire up the populace with the same plucky spirit is found wanting, with his actions yet to match his words. Today, Mr. Obama faces a trifecta of headaches. First the Eurozone sovereign risk woes, then the Middle East regime changes and now the Japanese disasters, the world’s third largest economy. And, there are similarities – all require bailouts and the piling on of debt.

Already the financial system is saddled with trillions of debt from the build-up to the financial collapse, the bailouts and subsidies, and today taxpayers are left with the bill for what happened. In only one term, Mr. Obama will rack up as much debt as all forty-three previous presidents combined. The horrific scale of debt boggles the mind and it is the breadth and depth of the financial hole that has shaken the confidence of the markets, keeping cash on the sidelines, placing stress on currencies as well as an impediment to any market improvement. Now it will be our children, and our children’s children who must bear the burden of their debts. Poor children.

Two culprits of America’s spending are military expenditures that saw the United States spend more than every other country in the world combined with expenditures of more than $1 trillion for the Afghanistan and Iraqi wars alone. The peace is even more expensive. The other major expenditure was for the trillion dollar bailouts for America’s mortgage market which almost sank the world’s economy. Ironically, the President’s own Financial Crisis Inquiry Commission (FCIC), after 19 days of hearings and 700 witnesses, concluded that the worse financial crisis since the Great Depression was actually avoidable. The Commission blamed the crash on regulations (or lack of), high-risk lending practices, systemic breaches of ethics, two administrations, the Fed and regulators. Ominously, the Commission also warned that it will happen again. America is still overleveraged. Easy money is even easier this year, easier than before the credit crunch. America somehow has the capacity to worsen its problems with self-inflicted wounds. Poor America.

Quite simply, a more fundamental rethink is needed. America must somehow rebuild growth and employment, based less on consumption, debt, and expanded government and more on manufacturing, exports and investment. Needed is for America to reduce its dependence on imported oil, which still accounts for roughly half of US demand. The US should start to look to the East on how investment could spark an industrial revival. Needed too is an overhaul of its tax system. America would do well to follow Canada’s lead by reducing the corporate tax rate to 16.5 percent which is more than half of the current 40 percent federal rate. Or even better, it could bring in a consumption tax. Needed too is an overhaul of the tort system. Another need is to address the long-term imbalance between revenue and spending for entitlements. Needed also is a realistic assessment of China as an equal, with some change in import policy to counter a change in the yuan – a true quid per quo, rather than a policy of hegemony. For all that the world has changed, America must change too. Solutions, not problems are needed.

The World Is Moving To a Sovereign Default

To be sure, massive deficit spending saved the world from a Thirties style depression and delayed the day of reckoning. However, Wall Street liabilities and bad debts were simply transferred to the public books. Similiarly the European sovereign debt liabilities were turned into public liabilities bequeathing a huge debt problem to taxpayers, particularly the Germans. First to fall was Iceland, then debt-ladened Greece and Ireland. Recently Moody’s downgraded Spain, reminding investors that Europe’s debt crisis was far from solved. The European Central Bank (ECB) introduced its own version of quantitative easing , buying government bonds and issuing trillions of euros to bailout its weakened members. But their banks are still in rough shape, dependant on the ECB for finance. While interest rates remain stubbornly high the bailouts simply failed to address the heart of the eurozone’s troubles – too much debt. Poor Europe.

To be sure, the European sovereign debt crisis raises serious questions whether the world’s largest borrower, the United States is heading for a greater crisis – a debt meltdown. The federal budget deficit at $1.6 trillion or 10 percent of gross domestic product is the highest since World War II and the third trillion dollar deficit in a row. Such a shortfall is unsustainable. The sheer size of the budget makes America’s long term structured fiscal problems intractable. Government spending is at 25.3 percent of GDP, the highest since the war. Federal debt has tripled in the past 10 years from $3.5 trillion to more than $9 trillion. Debt to gross domestic product has doubled. The interest bill on the national debt alone will be $240 billion. And America’s big three exploding entitlements, Medicare, Medicaid and Social Security combined account for 40 percent of spending were left untouched and unfunded in Obama’s budget. And none of these numbers include the $9 trillion of debt guarantees for government wards Fannie Mae & Freddie Mac which are supposed to be wound down. The economy remains on government support, and still, Mr. Obama and Congress have yet to pass his budget.

From 1960 to 2007, the US government debt to GDP ratio averaged 36 percent. At yearend US federal debt is projected at a dangerously high 66 percent, even worse than some eurozone members. The non-partisan Congressional Budget Office (CBO) projects without changes, that ratio will climb to 100 percent, levels associated with Italy, Greece and Ireland. And who is to pay for this red ink? Of course the US borrowed heavily from foreigners to pay for its spending. Yet, foreign ownership of US Treasuries which stood at 55 percent in 2008 has fallen to under 50 percent today as foreign buyers invest elsewhere leading to a large and rapid drop in the value of the dollar. US dollar securities are no longer viewed as a safe haven. Pimco, the world’s largest bond fund recently dumped all of its US government paper. Japan, the second largest buyer of US Treasuries now needs to repatriate funds for its mammoth rebuilding task. As a result, the Federal Reserve has become the biggest buyer of Treasuries holding $1.2 trillion.

Of course America could always issue more base money to buy dollars, but as the US prints more dollars, the avalanche of cheap dollars must depreciate further generating more inflation. And in bucking austerity and borrowing trillions of additional dollars on the assumption the world will lend them ever increasing sums, the United States simply postpones the inevitable. So while its President huffs and puffs over tackling America’s large and growing federal debt, little corrective action is taken. Even Mr. Obama’s so-called Simpson-Bowles Debt Reduction Commission which was to advise him on his debt problems, could not reach a consensus and its ideas were stillborn.

A Debt Meltdown?

A fiscal tsunami is about to hit America. The federal government’s ability to pay its bills will be tested in the upcoming negotiations to raise the debt ceiling which will sharply focus investors on America’s addiction to red ink. The government will soon hit the $14.3 trillion threshold. If the White House and Congress cannot agree to raise the debt ceiling, the US would have a debt meltdown shutting down government, and/or default on its international debt obligations causing financial havoc. The last debt ceiling fight was in 1995 when Bill Clinton and Newt Gringich fought for 21 days before a compromise was reached. And, the last time the debt ceiling was raised, President Obama controlled both Houses but that vote only passed by five votes. Poor US dollar.

It gets worse. State and local governments need money. Unlike the federal government which can borrow money to finance its deficits, states like California, Illinois and others cannot legally declare bankruptcy have accumulated budgetary deficits of $300 billion. In fact next year, forty-five states face combined annual budget deficits of $125 billion forcing some like Wisconsin to take tough stands with their unions, provoking protests, lawmaker walkouts and strikes. Last year, the federal government’s TARP programme bailed out the states but with the prospects of no more handouts, some are on the brink of collapse. Not so lucky are the municipalities which can declare bankruptcy (remember New York) and some are locked in combat with their unions, threatening defaults which could sink the $3 trillion municipal bond market, overshadowing the sub-prime debacle. Ironically the same players who guaranteed the municipal debt also guaranteed the risky sub-prime paper of yesteryear. And like, a game of chicken, America is heading down the path of another made-in-America crisis. Poor taxpayers.

Inflation is Back

Last year the markets were concerned about deflation but today the bigger threat is inflation which allows America and others to default through inflation. Inflation is first a monetary phenomena. We expect the coming inflation to be similar to the commodity surge in 1971-1973 following the Viet Nam War. The dollar once stood for a sum of gold. Then the central bank supplied excess dollars forcing domestic prices higher and America abandoned the gold standard. The dollar lost much of its value, falling to less than 850th of an ounce of gold from the 35th an ounce set under Bretton Woods. With little capacity to spare, shortages ensued and two oil embargos sent oil prices higher. Noteworthy, from 1972 to 1973 there was much higher food inflation in Japan than in the United States where inflation was considered dead. But by 1979, inflation was much higher in America with producer and consumer prices at more than 13 percent. The inflation of the seventies was only stopped from morphing into hyperinflation by Fed Chairman, Paul Volcker, who imposed double-digit interest rates in order to strangle the inflation beast.

While events in Tunisia might have changed the Middle East geopolitical environment, excess demand, soaring prices, tight supplies and Mother Nature is again stoking inflationary pressures, triggering food riots that sparked the regime changes. And as before, global monetary conditions are still too loose with industrialised countries monetizing their debts through the debasement of their currencies, providing the feedstock for higher inflation. Already straining under a 200 percent debt to GDP ratio, Japan is faced with a herculean task to rebuild its economy after the earthquake and tsunami devastation. The enormity of the Japanese triple disaster is staggering. The Bank of Japan will have to unleash its own version of quantitative easing, pumping huge amounts of money into the economy. Yet interest rates are already near zero, so boosting money supply will involve large-scale money printing and debt monetization which is sure to have inflationary implications.

Similarly while the Federal Reserve’s money printing and gargantuan deficits are not causing concern in Washington, policymakers appear to be blind and complacent to soaring commodities and the harbinger of rising inflation. Fed Chief Bernanke said that any inflation spill over was likely to be “temporary and relatively modest”. Yet wholesale prices jumped 1.6 percent in February, the biggest gain since 1974.

Today it is the hedge funds, equity and sovereign fund that are the new buyers tilting the fragile supply/demand commodities balance, using the new and improved structured products created by Wall Street. However like gold we find ourselves living in a finite world, one in which resource companies are facing huge demand and limited supplies. And in the rush to commodities in the past few years, farm land prices have increased and today there are public companies whose sole purpose is to acquire farm land. In another sign of inflation at Tokyo’s Tskiji central fish market, a 714 lb blue fish tuna was sold at a record $400,000 or $560/lb. Inflation is back, Bernanke just doesn’t see it.

Another inflationary factor is the Chinese conflict between industrialization, urbanization, and agriculture. China feeds one fifth of the world’s population on only one tenth of its arable land. Residential areas have been built at the expense of cultivated farmland. Moreover, China’s population is expected to reach to 1.5 billion people by 2030, putting more pressure on China’s resources and ability to feed its people. In China’s recent Five-Year Plan (2011-2015). China’s agriculture is threatened by its available water supplies. While China has 2.8 trillion cubic metres of fresh water reserves which is sixth in the world, its per capital water availability is only one fourth of the world’s average according to the Ministry of Water Resources.

Oil, copper, steel, and land are all the fundamental building blocks of inflation. Supply shocks in the wake of the Japanese nuclear crisis will only exacerbate the trend. While much is made of America’s benign “core” consumer prices which exclude food and oil, western policymakers are repeating the mistakes of the seventies and are eerily blind to the importation of inflation. There is no question that the rise in consumerism from China and other emerging countries has strained resources. In China, inflation has doubled more than 5 percent, the second highest in the world after Croatia. Interest rates in Brazil have increased to 11.25 percent. Inflation has already hit the United Kingdom where it has doubled. We believe that Chinese inflation will be its biggest export. To be sure, the near term risks are now to the upside.

China and Currency Wars

Defacto currency wars have become the norm. Chile announced It would buy $12 billion of foreign reserves this year. Switzerland too has purchased dollars as central banks around the world intervene to buy dollars to stop their currencies from soaring and stem the big inflows of foreign cash. The Group of Seven coordinated action to stabilise the Japanese currency, after the March 11 earthquake. In other words, the world’s major economies must pursue America’s extraordinary loose monetary which has caused an inevitable pickup in domestic inflation. That’s why China bought bonds in an effort to mop the excessive liquidity reigning in bank lending with interest rate hikes as part of its exit strategy. In October, the People’s Bank of China raised interest rates for the first time in nearly three years and since has raised rates three times in an effort to cool is super-hot economy. Even the ECB is considering rate increases.

To ease pressure on the yuan, Beijing has slowly lessened its reliance on dollar assets by purchasing euro debt which make up about 25 percent of China’s foreign reserves. At $2.8 trillion, China has the largest amount of foreign exchange owned by any central bank in the world. As China invest more, it will use its financial power differently. Already, China is advocating expanding the IMF’s Special Drawing Right (SDR) which is partially backed by gold, calling for the development of a global reserve currency. We expect China will also help in the rebuilding of Japan, it biggest export market. China with almost 30 percent of the world’ entire reserves has acquired stakes in dollar denominated resource companies as an alternative to US Treasuries.

Chinese gold imports doubled over last year overtaking India as the largest consumer of gold in the world. However China has only 1,054 tonnes or 1.7 percent of its foreign currency reserves in gold, in contrast to the 10 percent average held by most major economies. China disclosed last year that they had purchased 450 tonnes and are reported to be buying directly from their producers. However, to achieve a 10 percent weighting, China would need to purchase the entire world’s output for the next two years. China is expected to lead the way bringing gold back as a monetary asset. From the Chinese point of view, internationalising the yuan as a reserve instrument would reduce its dependence on the dollar and down the road, a shift to a multi-currency bloc with gold is likely with a dollar basket in the West, euro-basket in Europe and yuan basket in the East.

Gold Is Money

Money is an IOU, or a promissory note whose value depends upon on the likelihood of being paid back. Today, money and credit have become synonymous. Debt has become money. The US dollar is a faith-based currency and the cornerstone of modern day finance, but its role is found wanting. We believe gold’s new highs are due to the revival of its historic role as money. Gold is a barometer of currency fears. If people believe the dollar or other currencies are overvalued, gold is a natural haven. And as the world questions the very institutions that issue paper currencies and as that faith declines, gold will increase in value.

So far, with dollars and euros falling in value, investors have been buying gold to protect themselves from the debasement of those fiat currencies. The world’s central banks, led by the Fed are stuck in a huge fiscal mess and there is a weakening trust in their ability to handle the world’s financial affairs. The Middle East geopolitical events exposed the world’s Achilles heel – oil denominated in dollars. No wonder, gold has been going up in value against every currency. Investors have simply lost confidence in markets and the US. Gold is a better alternative. We believe that America’s inability to sort out its finances and doubts about its fiscal sustainability will keep gold higher. Moreover, widening geopolitical tensions, together with Mother Nature’s disasters like the floods in Australia or the earthquake in Japan will send inflation higher making a bad situation even worse. Add a credit risk premium to sovereign risk then, gold will be a good thing to have.

No Currency Is Safe

Investor demand for gold remains strong as gold-backed exchanged traded funds (ETFs) grew 20 percent last year garnering so much bullion that they now hold more gold than the official reserves accumulated by every country except US, Germany, Italy and France. The ETFs have become the people’s central bank. At the same time, the International Monetary Fund has concluded the sale of 403.3 tonnes of gold with the buyers including India, tiny Sri Lanka and Mauritius. For the first time in twenty years, central banks became net buyers of gold last year.

We believe the dollar’s role as the world’s reserve currency which allows the US to finance its external requirements cheaply and live beyond its means is at an end. Lately the US is looking like just another heavily indebted country with as its fiscal policies undermining its global role. Without confidence in the dollar, the world has no reserve currency. Until confidence is restored, gold will be a good thing to have, particularly in advance of the US debt ceiling negotiations in the coming months. Today, sixty percent of the world’s foreign exchange remains in dollars, despite America’s share of global output at only to 20 percent. Last year the sovereign debt problems pushed gold higher and euros, the pretender to the throne fell in value because it too is a faith-based currency. Gold is the default currency. With a US debt meltdown in the offing, China and even deficit countries are looking for alternatives because global trade today is underpinned by an overvalued currency. Gold is a good thing to have.

Gold has risen every year for ten years now and there are fears that the bull market is getting long in the tooth. We disagree and believe that this bull market is only a calf. Gold is still underowned as an asset class. Last year, gold was propelled by the collapse of the euro and gold was seen as a better alternative for many. The consequence of the bailouts resulted in the piling on of more debt upon more debt and the failure of currencies to protect assets, forced investors and central banks to look for safer alternatives. And now, with the geopolitical environment heating up, looming debt ceiling showdown together with increasing inflation, gold has become the haven of choice. Consequently we expect gold to average $2011 an ounce in 2011.

Recommendations

Today there is a modern day gold rush underway as mining companies use Bay Street to mine for gold in a scramble for deposits amid a dearth of new projects. Mining companies no longer use “bear hugs” and there are more hostile bids reflecting desperation for new ounces. And, given that recent takeovers were at more than $1,000 per ounce of resource, companies are obviously betting that the price of gold will head higher. The biggest deal, of course, was Kinross’ controversial purchase of Red Back Mining in Mauritania for about $7.1 billion, which resulted in 40 percent dilution. The newly acquired Tasist mine has proven to be more expensive than they thought. While proven and measured reserves at Tasiast increased, Kinross would need to triple this to make this acquisition work. Not all acquisitions are good. Our expectation is that the takeovers and merger activity will continue since the majors appear stuck on a treadmill. Indeed, for the second year in a row, Newmont has not replaced production and faces the difficulty of replacing quickly depleting reserves. Others have been more successful such as Agnico-Eagle which has been able to grow organically as well as through the drill bit. We continue to believe that the sweet spot for the market are the junior explorers like East Asia, US Gold, Detour Gold, St. Andrews Goldfields Continental Gold, and Aurizon with silver plays Excellon and Mag Silver as attractive buys here. These juniors do not face the long term horizon of bringing a gold mine into production or the need for multi-billion capital costs. The juniors are simply the best group with ten-bag potential.

Aurizon Mines Ltd.

Aurizon expanded its 100 percent owned Casa Berardi resource by 40 percent to 1.5 million ounces, extending mine life to more than 10 years. Casa Berardi will produce 165,000 ounces at an average grade of 8 g/t over the next several years up from 140,000 ounces produced last year. Recoveries for the year averaged 89.8 percent. Aurizon is planning to spend $13.4 million on exploration at Casa Berardi. Aurizon has also begun a feasibility study on the Hosco open pit deposit at 100 percent owned Joanna gold project in Rouyn-Noranda, Québec. The company is looking at the use of autoclaves for this open pit deposit and detailed engineering has begun. Aurizon expects two to three drill rigs will be turning on this property. Of note is that Aurizon expects to spend over $21 million at its other Quebec properties with most at the Fayolle property where a 44,000 metre drill program is planned. The property covers 39 mining claims covering almost 14,000 hectares across Porcupine break, situated only 10 kilometres north Aurizon’s Joanna project. Aurizon has $140 million in cash and no debt. Buy.

Barrick Gold Corp.

The world’s largest gold producer, Barrick Gold posted a record fourth quarter production of 1.7 million ounces and almost 7.8 million ounces for the year. Barrick has the world’s largest proven and probable reserves at 140 million ounces. However production for the year will be flat despite crown jewel, Cortez Hills in Nevada producing more than 1.3 million ounces this year. Barrick is spending more than $4 billion on capital projects with Pueblo Viejo in the Dominican Republic and Pascua Lama on the border of Argentine and Chile taking the bulk of those funds. Barrick is in need of a fill-in candidate and something like Detour Gold would be an obvious acquisition candidate since it is in Barrick’s own backyard and attractive from a growth and taxation point of view. Cost inflation is a problem particularly for big projects like Cerro Casale in Chile whose price tag is now at $4.5 billion. We continue to view Barrick as the “go to” company for institutions. Buy.Centamin Egypt Ltd.

Centamin shares suffered a setback because the flagship Sukari mine is located in Egypt. While there was no disruption, investors were fearful. Nonetheless, Sukari has a large resource of almost 11 million ounces plus another 4 million ounces in the indicated category. We like undervalued Centamin here despite the problems in Egypt. Centamin is debt free and could produce 500,000 ounces by 2012, up from 160,000 ounces this year. Buy.

Continental Gold Ltd.

We have been following Continental Gold because of the exciting high grade Buritica project in Columbia. Drilling has outlined a promising high-grade San Antonio vein which has been tested with an aggressive 60,000 metres drilling program. Results to date have been impressive and with a growing footprint, management is fast tracking the Buritica development with eight drills turning. Continental has a strong balance sheet. We like the shares here.

East Asia Minerals Corp.

For some time we have recommended East Asia as our top pick because of our expectations that the Miwah project in Aceh, Indonesia will grow in size. East Asia has four drill rigs turning but those rigs are largely drilling infill holes as part of the initial mineral resource NI-43-101 report by Mining Associates of Australia. While East Asia promised the resource report by the first quarter, it now appears that it will be delayed till the end of the second quarter. We expect that the resource will be between 7 to 10 million ounces depending upon the envelope outlined by Mining Associates. Since the recent activities have been largely infill, East Asia has not been able to expand the Miwah deposit and the shares have drifted sideways. As a consequence, East Asia announced plans to spinoff three subsidiaries, Sangihe, Barisan and Energy in order to surface hidden values. While East Asia’s shares moved up on the announcement, we are concerned that taxation, regulatory and partnership issues may delay the spinoff.

We believe that best way to boost value is through the drill bit and East Asia should more aggressively drill to the north and drill around the South Bluff zone. In addition, the company should expand its drill program by acquiring more deep drills to better delineate the deeper shoots that should be tested which would enlarge the resource. Finally, the shares have been hurt by the Indonesian factor, particularly over its status in a protected forest area. We have always believed this to be a non-issue and expect approvals from both local and central government who are both pro-mining, particularly in the Aceh province where jobs would be needed. While we continue to recommend East Asia here, we are concerned that the discount remains. As such we would like to see the company become more aggressive with their drilling and look forward to the 43-101 which will be the first step towards a feasibility report which must be completed by the end of next year.

Detour Gold Corporation

Detour in northeastern Ontario is to be one of North America’s largest gold mines, with open pit reserves of 15 million ounces and resources of 20 million ounces at flagship Detour Lake. Management is experienced led by Gerald Panneton, who has put together a good management team that will develop the project on their own. With a start up date of mid 2012, infrastructure is in place with a paved highway and power less than 200 kilometres away. Scoping studies call for an eventual gravity/cyanidation and CIP processing facility operating at 55,000 tonnes per day. With $970 million in cash, the company is well financed and could be producing 650,000 ounces per year. Detour Gold is a huge low grade deposit that will attract the majors as it proceeds to development. Buy.

Kinross Gold

Kinross has eight mines located in United States, Russian, Chile, Brazil and now Mauritania. While Kinross expanded its resource at the Tasiast project to 18 million ounces, the price tag to develop has increased $2.2 billion dollars which appears to on the low side already. Meanwhile at Kupol, its 75 percent owned mine in Russia’s north region will decline to 738,000 ounces of gold equivalent due to a decline in grade. Costs increased in the quarter and while there was much arm waving about Tasiast’s increase in reserves, the capex was much higher than projected. We believe that Kinross should be a source of funds at this time.

Newmont Mining Corp

Newmont paid $2.3 billion for Fronteer Gold which has three projects in Nevada, including the Long Canyon project which is about 100 miles from Newmont’s existing operations. Despite picking up Fronteer’s Gold’s Northumberland and Sandman project, Newmont is mainly paying for the Long Canyon assets at a rich price of $1,000 per ounce. Newmont is stuck on a treadmill and is looking out for these fill in candidates which will complement Newmont’s Nevada operations which produced 1.7 million ounces. The Long Canyon gold project is in the development stage. Meanwhile Newmont had a good quarter at $1.61 share. This year Newmont should produce about 5.2 million ounces due in part to lower production from Batu Hijau in Indonesian where its copper output will decline by almost half. Newmont has budgeted $360 million for Leeville, Yanacocha in Peru and Hope Bay in Canada so it is in need of a fill-in producer. Although sitting on $7 billion of cash, Newmont is harvesting their assets.

Northgate Minerals Corporation

Northgate was one of the few gold miners to post a loss due to lower production, higher costs and the pending closure of the Kemess mine in British Columbia. Northgate also posted recorded a hedging loss on its copper forwards. Production at the Fosterville mine in Australia should be more or less flat at 100,000 ounces which produced 35 percent of Northgate’s production in the quarter. Northgate will produce about 200,000 ounces this year. Northgate is stuck to harvesting until the Young-Davidson mine comes on stream. Near term, Northgate is dead money. Sell.

US Gold Corporation

Rob McEwen’s US Gold is expanding the El Gallo project in Sinaloa State, Mexico. The deposit is open in all directions and there are nine drills operating with four more scheduled to arrive. US Gold is spending $15 million drilling a whopping 650,000 acre package in Mexico and is aiming for a feasibility study for yearend. US Gold recently completed an $100 million offering so the company is well financed. To date 280 holes totalling 50,000 meters have outlined a 60 million ounce silver resource. The developer “ball parked” El Gallo as potentially producing 5 million ounces of silver and 50,000 ounce of gold annually. We recommend the shares here.

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